If the words “trust fund” bring to mind a young person who doesn’t have to work thanks to their wealthy family, you may want to rethink your definition. A trust is a type of estate management that isn’t only for the elite. Learn more about a trust and how it benefits your family.
What Exactly Is a Trust?
A trust is a legal arrangement in which a third party, or trustee, holds assets on behalf of the beneficiaries. The trustee manages the assets in the trust, while the income from the trusts goes to the person or persons named in the trust. There are two main types of trusts:
- Revocable trust – this type of trust is also called a living trust. You create this trust and place your assets in the trust while you are still living and plan to live for a long time. You retain control over your assets until your death. When you die, the trust goes to your heirs. You keep your assets out of probate, but your heirs may still have to pay estate taxes, depending on the size of the trust.
- Irrevocable trust – An irrevocable trust avoids probate and estate taxes. The key difference between a living trust and irrevocable trust is that the irrevocable trust cannot be changed or altered once it is created. You give up control over the assets, even though you may benefit from the trust.
Trusts can be set up tailored to each person’s assets. The beneficiaries are named by the person who sets up the trust. You can set specific guidelines for your trust, based on your own family. The trustee must manage the trust in accordance with your wishes. Although trusts are often used as a will, they don’t replace the need for a will. You should work with your estate planning lawyer to make sure that your final wishes are in order.
Who Needs a Trust?
Generally speaking, anyone with a portfolio of assets that amount to more than $100,000 can benefit from a trust. Because a trust is very specific about how and when assets are distributed, a trust can be more beneficial than a will if you have small children or beneficiaries who don’t manage money well. A trust can be more expensive to set up than a will, but your beneficiaries benefit from this trade-off by not having to go through probate and potentially avoiding taxes.