Trust Funds 101

Ray’s Take: Most people have heard the expression, “He/she is a trust fund baby.” But what does that mean exactly?


Most people do not understand the basics of a trust and think they are only applicable to children or heirs of high-wealth individuals and businesses. While many times this is true, there are certain situations when a trust might serve as an integral part of your overall planning.


So what is a trust? By definition, a trust allows a third party, or “trustee,” to hold your assets on behalf of a beneficiary or beniciaries. A trust is made up of three parties: the “trustmaker” (you); the “trustee,” which is the person responsible for managing the property or asset until it is transferred; and the last party, the “beneficiary,” which is the person or entity you name as the recipient of the benefits you leave for them.


Before the option of 529 accounts became available, I’ve seen families use trusts to help save for their children’s college and professional education. In addition to professional management, there are a number of estate and income tax advantages. Further, there are asset protection opportunities that are not insignificant in this litigious world.


A trust may be useful when a family has a special needs or grown adult child that may not be able to handle a large sum of money if given to them through a traditional will.


Putting money into a trust allows the trustee to distribute the funds within your selected timeframe and parameters. It also protects those assets from judgments should the beneficiary be liable for damages or divorce settlements. Money in a trust does not go through the court system, allowing access to it more efficiently.


It’s important to understand that once you place assets into the trust, they are no longer yours. But since they are not yours, you will not pay income taxes on the money. It’s a useful tool that can help reduce your estate taxes.


Don’t be afraid of trusts; just know when it’s appropriate to use one. And always consult with your financial adviser or attorney when trying to decide if a trust is right for you.


Dana’s Take: Think of people you know who have inherited wealth. Did it bring them happiness or problems? A gift of money might sap a child’s drive to work and could even cause friction in their relationships. Inherited money often becomes “my” money in a marriage, while earned money is usually “ours.” However, leaving money to worthy causes, instead of family, can breed resentment.


Experienced financial planners and estate planning attorneys have seen every variation and can advise you of options that may achieve a balance that reflects your wishes and values.


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