Ed Sheeran’s “Trust Fund Baby” (a hit single recorded by the California boy band Why Don’t We) speaks derisively of inherited wealth. And true enough, the term “trust fund” does bring to mind legendary old money, with names like Vanderbilt, Rockefeller and Ford. Certainly, dynastic trusts exist, but they are very few and far between. There are many more families of modest means who use trusts for personal as well as financial reasons. More importantly, many other families should consider setting up trusts for a plethora of reasons having nothing to do with multigenerational wealth transfers.
A trust is a legal entity created through a private agreement between a grantor (sometimes referred to as “settlor” or “trustor”) who contributes property for the benefit of one or more beneficiaries, and a fiduciary, known as the trustee. A trust is governed by its trust document; a set of rules in which the grantor states, with varying specificity, when, and under what conditions, the trust’s assets may be distributed to the beneficiaries. Trusts certainly can be established for estate tax savings and to pass on wealth to future generations. More often they are created in contemplation of the more immediate needs of the grantor. Examples are many and may include: the desire for legal protection from creditors (asset protection trusts); protecting beneficiaries from themselves (spendthrift trusts); protecting children with disabilities (special needs trusts); protecting assets when applying for Medicaid; and funding education. In short, there are many current life situations where trusts are a very valuable tool.
The trustee(s) can be a family member, a friend, or a professional, such as an attorney or financial advisor, a bank or trust company, alone, or in combination serving as co-trustees. The beneficiaries, often family members, can be whomever the grantor chooses. The terms outlined in the trust agreement can be very specific or quite general. Sometimes the trustee is given very broad distribution authority with language such as “absolute discretion.” Other time we see a somewhat narrower “ascertainable standard” such as distributions for HEMS – health, education maintenance and support.
As part of my professional practice it is unusual for me not to recommend incorporating one or more trusts into my financial and estate planning. As a basic example, rarely would parents want children to receive an inheritance at 18 years – the most common age under state law –should both parents pass prematurely. They would want their will to create a trust to hold and manage their assets until the children reach certain ages. A trust created under the provisions of one’s will is known as “testamentary” trusts; very often we create trusts during one’s lifetime, called “intro vivos” trusts.
In the past I’ve written about several different types of trusts—special needs trusts, revocable trusts and qualified terminable interest property (QTIP) trusts. In future columns I’ll be discussing still other uses for trusts, including those primarily intended to minimize estate taxation, and to facilitate philanthropic and multigenerational wealth transfers.
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