Do you immediately associate “trust fund” with a privileged individual who doesn’t need to work a day in their life? Or perhaps, it brings to mind certain celebrity heirs who gained immense fame due to their substantial wealth. For most of us, our perception of trust funds is largely influenced by media portrayals, often leaving a negative impression. However, exploring trust funds and their functionality in more common scenarios holds significant value.
While it’s challenging to determine the exact number of Americans with trust funds at any specific time, recent data from April 2022 indicates that 67 percent of Americans lack an estate plan. This suggests they don’t have a will or a trust in place. Previous studies on inheritances reveal that in 2010, only 21 percent of American households transferred wealth from one generation to the next.
Moreover, data reveals that not every millionaire acquired their wealth from affluent family members. As per a 2022 Ramsey Solutions study, “While 21 percent of millionaires received some inheritance, only 3 percent received an inheritance of $1 million or more.” This indicates that the vast majority—79 percent—of today’s millionaires accumulated their wealth without significant inheritance from their parents or other relatives.
Conversely, the desire to leave something of value—cash, investments, properties, jewelry, and more—to children or preferred charitable organizations doesn’t necessitate being a millionaire. However, the process involves more complexity than merely drafting a list of assets and stashing it away. Legally, this documented information would be regarded as a will. Nevertheless, wills require review in probate court, and these transfers might be subjected to substantial taxation. In fact, one of the primary advantages of a trust fund is its ability to avoid probate court. Here is a comprehensive guide to trust funds and five reasons why considering one is beneficial.
What are trust funds?
Candace Dellacona, a trust and estates attorney in New York City, describes a trust as an entity where individuals can allocate assets, such as real estate, bank accounts, brokerage funds, life insurance, and more.
Many individuals place their assets into a trust to simplify the process of distributing them. Trusts also aid in reducing tax obligations and maintaining the privacy of ownership of high-value assets.
Who is involved?
Three key roles are typically associated with a trust, each with significant responsibilities.
1.Grantor
The grantor is the individual who transfers their assets to the trust. By doing so, the grantor relinquishes ownership over specific assets placed into the trust and allows a trustee to oversee them. Although the grantor may choose to transfer full ownership immediately, most opt to name a successor trustee—someone who will assume ownership only upon the grantor’s death or incapacitation.
2.Trustee
The trustee is responsible for managing the trust, particularly after the grantor’s passing. While alive, the grantor may act as the trustee and appoint a successor trustee to take over in the event of incapacitation or death. Depending on the guidelines set by the grantor, the trustee may have specific directives regarding how to handle the assets.
3.Beneficiaries
Beneficiaries are the individuals or charitable entities set to receive the assets held in the trust when the specified event occurs, typically upon the grantor’s passing. The trustee must adhere to all the provisions outlined in the trust, fulfill tax obligations, and communicate any alterations to the beneficiaries.
Types of Trusts
The two primary types of trusts are revocable and irrevocable.
Revocable trusts, the more common of the two, offer greater flexibility compared to irrevocable trusts. Throughout the trust’s existence, a revocable trust can be altered. The grantor retains the ability to modify the assets within the trust, adjust beneficiaries, and more.
Conversely, an irrevocable trust is considerably more rigid. Once assets are placed within an irrevocable trust, modifications cannot be made without the consent of the beneficiaries. For taxation purposes, an irrevocable trust has its unique employer identification number. Once established, it cannot be linked to the social security number or individual taxpayer identification number of the creator.
5 Reasons You Might Consider a Trust Fund, Even if You’re Not Wealthy
- You want every cent of your assets to go to your loved ones. Assets not included in a trust fund typically undergo probate court proceedings in your state of residence. This process incurs costs for your beneficiaries, and any disagreement could lead to the government retaining assets intended for your loved ones. When you don’t have substantial wealth to pass on, the legal process’s costs reduce the final amount received by your heirs—whether a family member or a charity. Sara Ovando, a partner at Ovando and Bowen in California, states, “If you go through probate, creditors will take the first share of anything you plan to leave your children or grandchildren, and you risk family disputes in court.” Trusts ensure that everything you possess, regardless of its size, reaches the intended inheritors.
- You want to support a beneficiary with disabilities. “Trusts are frequently set up when a parent has a child with a disability,” mentions Dellacona. If you have children or grandchildren with disabilities whom you want to financially assist after your passing, you can define specific conditions in your trust. Receiving funds through a trust also helps ensure continued eligibility for social security benefits, such as Old-Age, Survivors, and Disability Insurance. It also safeguards them from losing need-based benefits, such as subsidized housing and health insurance, despite receiving an inheritance.
- You want to ensure your children receive their inheritance if something happens to you. Predeceasing your children before they reach adulthood is a devastating possibility that troubles many of us. While parents usually obtain life insurance to protect against this scenario, trusts also provide an additional layer of security. Establishing a trust allows a grantor to specify that beneficiaries who are currently minors will access their inheritance when they reach the legal age. With a trustee mandated to manage the trust according to these specifications, it can include funding their education, necessities, or skills even before the minor gains full ownership.
- You want your family to have the space to grieve. The complications of probate court are the last thing a grieving person should face. Instead of finding solace while mourning, loved ones might be sifting through paperwork, shuttling to and from court, and attempting to recall discussions about the deceased’s intentions. Probate is a mandatory process, with each state setting estate limits. “In California, for instance, probate is required for anyone passing away with assets totaling $184,500; there exists a simplified probate for smaller estates,” states Ovando. “However, a properly funded trust can prevent your estate from having to undergo probate.” If your family is blended—with children from different relationships or multiple spouses—probate court often reopens old wounds that a trust can lay to rest.
- Seeking Tax Benefits As mentioned earlier, Ovando explains that an irrevocable trust is a legal entity that acquires its own employer identification number for tax reporting purposes. Assets in an irrevocable trust are also exempt from estate taxes. As the assets are no longer held in an individual’s name, the grantor isn’t subject to income taxes on the trust’s earnings during their lifetime. This strategy can effectively reduce your taxable income while alive.
Even more advantageous, beneficiaries aren’t subject to estate taxes on inheritances received from a trust. This significantly impacts an heir reliant on income-based services. Even a minor inheritance could substantially impact their benefits. It’s unfortunate if they end up paying more in taxes or experiencing benefit losses exceeding the actual value of the inheritance.