Trust funds and how to use them for estate planning

  • A trust fund can be set up to share assets with a loved one while you are still alive and long after you are gone.

  • Assets in a trust are overseen by a person you designate, known as a trustee.

  • In addition, creditors cannot touch trust funds, and trusts can bypass probate and result in substantial tax savings for your beneficiaries.

  • The two main types of trusts are revocable and irrevocable.

  • The details of revocable trusts (known as living trusts) can be changed over time, but an irrevocable trust cannot be changed once it is established.

A trust fund is a good way to provide for your loved ones, whether it’s part of estate planning or as financial support while you are alive.

Trusts are a way to keep assets safe, and have them managed for long-term security. Depending on how the trust fund is designed, it can be made available to your loved ones immediately in the event of your death, or once they reach a certain age.

There are several advantages to setting up a trust, especially if it is distributed after your death: Creditors can’t touch it, it doesn’t need to go through probate, and it reduces the amount of inheritance taxes owed.

How trust funds work

A trust fund involves three parties: the grantor, the beneficiary, and the trustee. The grantor creates the trust fund for the beneficiary, and the trustee is a neutral third party who manages the trust and distributes it based on the trust’s agreement.

The trustee is responsible for making sure the grantor’s wishes are carried out correctly.

Creditors can’t touch trusts, they don’t have to go through probate, and they can reduce the tax burden after you’re gone.

This could mean the trustee distributes money to a child for their education, gives them the full amount of the trust once they reach a certain age, or administers the trust in monthly or yearly amounts after the death or grantor.

But before you set up a trust, it’s important to figure out what type of trust is the best for you and your beneficiaries.

Types of trust funds

The two basic trust structures are revocable and irrevocable. A revocable trust can be changed after it’s created, but an irrevocable trust cannot.

For instance, a revocable trust (also known as a living trust) could be set up so that the grantor is in charge of the trust throughout their lifetime, then it becomes the trustee’s responsibility after the grantor passes away.

Another common revocable trust is a marital trust, purchased by a couple. When one spouse dies, the assets go to the surviving spouse.

When the surviving spouse passes away, the trust is transferred to their heirs without going through probate and with the benefit of unlimited marital deduction—a provision that enables spouses to pass assets to each other without tax consequences.

But there are even more irrevocable trusts to choose from, with different financial and tax advantages, including:

  • Asset Protection Trust (APT): This type of trust protects the assets from any possible claims from creditors down the road.

  • Special Needs Trust: This can be set up to provide support for a chronically ill or disabled person without reducing their eligibility for government benefits.

  • Charitable Trust: If you want to create a trust for a charitable organization or similar group, this would pay out the same amount every year.

  • Generation-Skipping Trust (GST): Just as the name suggests, this trust skips the direct descendants of the grantor and goes directly to the grandchildren instead—or anyone who happens to be 37½ years younger than the grantor.

  • Grantor Retained Annuity Trust (GRAT): This type of trust helps to avoid paying taxes on gifts that might be given to loved ones from the trust.

  • Land Trust: A trust that’s set up for land means the property is taken care of by the trust and the assets within the trust that are specific to the land.

If you’re the executor of an estate with a trust fund

In many cases the trustee and the executor are the same person. If that’s not the case, it’s important that both parties work together closely for the first few months following the death of your loved one. The trustee has every right to know why you, the executor, are making the choices you’re making.

If the will guarantees the assets will automatically be transferred to a trust when they pass away (known as a pour-over will), then the executor will transfer those assets to the trustee, who then distributes the trust.

If you’re the beneficiary of a trust fund

Whether or not you know you’re the beneficiary of a trust, you will be contacted by the executor or the trustee after your loved one passes away. Most states require that this be done within 30 to 60 days.

If your name isn’t specifically on the trust, but a broad term like “children” is used, then your next steps will be determined by the laws in the state where your loved one passed away.

No matter what type of trust fund you choose to create, it’s never a bad idea to put aside some assets for your loved ones—or your favorite charities. They’ll receive financial support as well as protection from creditors and substantial tax advantages. It’s just a matter of deciding what trust is best for you and who you want to provide for, long after you are gone ●