Reasons Why Setting Up a Trust Can Benefit You and Your Heirs

28 Jul Reasons Why Setting Up a Trust Can Benefit You and Your Heirs

Setting up a trust can help individuals direct assets to their heirs and minimize the tax impact of owning and transferring these assets.

Here are five reasons why setting up a trust can benefit heirs:

1) Trusts are managed by fiduciaries

A fiduciary is someone who is put into a position of trust, and a fiduciary must put the best interests of the client first. A trustee is a fiduciary who is assigned the right to hold title to assets on behalf of a beneficiary. This means that the trustee must manage the assets based on specific guidelines provided in the trust document.

Assume, for example, that the trust document states that safety of principal (original investment) is the investment objective for assets in the trust. To comply with this instruction, a trustee would only invest in treasury bonds and highly rated corporate bonds that maintain their principal value over time. The trust document protects the interest of the beneficiary.

2) There are several variations of trusts

While the specific rules for setting up a trust can vary by state, there are several broad categories of trusts:

A living trust (or inter vivos trust) allows an individual to use the assets in a trust during his or her lifetime, and then transfer the assets to a beneficiary when the individual passes away. A grantor can also consider a testamentary trust, which is a trust that goes into effect when the grantor of the trust passes away. These trusts also specify how assets are to be distributed at death.

These options may allow a grantor to set up a trust with a larger asset balance. Assume, for example, that a grandparent owns $3,000,000 in investments, but needs to earn an income on the interest and dividends generated by the investment portfolio. The grandparent can move the assets into a living trust, which allows the investor to access the trust assets during their lifetime. At death, the assets can be transferred to their beneficiaries.

3) Some trusts can be changed after creation

A revocable trust allows a grantor to change the terms of the trust agreement, and this may be an important option for many asset owners. A grandparent can add a new grandchild to a trust agreement, or change the age at which assets are distributed to a beneficiary. The revocable trust option ensures that heirs can be added to a trust over time.

4) Trusts offer privacy

When an individual passes away, their will is a public document. On the other hand, a trust is a private agreement that addresses many of the same issues as a will. By setting up a trust, the assets transferred to an heir are not disclosed to the pubic.

5) Tax planning

Trusts can be used in certain situations to reduce income and estate taxes. Over time, the total asset balance may grow faster in a trust, and generate a larger inheritance for the heirs.