What Is A Trust And Is It Beneficial?

By: First Union | Date:


What Is A Trust And Is It Beneficial?

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Upon hearing the word trust, most people may not exactly be sure what it is or how exactly it works. Most are familiar with the term trust fund, but beyond that don't know what to think as far as what it entails. Simply put, a trust is a legal vehicle that enables you to place assets into a trust fund which are then generally managed by a third party on your behalf. As far as taxes go as well as questions of inheritance, a trust can make things quite a bit easier. In this article, we look at what exactly it is and the different types of trusts that exist.

Creating a Trust

Despite what some may think, you don't necessarily have to have millions of dollars in cash or assets to establish a trust. More and more families are creating it with the intent of protecting their investments and their families over the long term. The great thing about it is that in tandem with a will, it helps to make the process of asset distribution much more streamlined and faster than if you have just a will alone. Matters connected to your estate are more clearly spelled out and the implementation of your directives, by a third party administrator, is therefore expedited.

In establishing a trust, most people will enlist the services of a financial advisor or in some cases, an attorney. What happens in certain instances if you do not have established is that your assets and real estate, for example, can get tied up in probate and your heirs are then looking at a lengthy and somewhat arduous process.

Among the key features of a trust is the fact that you not only determine who the money goes to but consequently how the funds are paid out as well. So for example, if the beneficiary is relatively young and/or their ability to manage money is in question, you can specify precisely how and when that person will receive the funds. In such cases, the trustee (or 3rd party administrator of your trust/) will carry out your orders.

Benefits of Establishing a Trust

As noted, trusts are not merely for those who have a substantial amount of assets. More and more people are creating trusts to help protect assets and their families. Some of the benefits that come with having a trust in place:

  • You decide exactly where your assets will go when they will be disbursed and in what manner the assets will be distributed.
  • Saves your heirs the hassle of having to go through probate and also of having to pay exorbitant court fees and/or taxes.
  • If for example, there are second marriages and/or stepchildren, the trust can account for this.

All in all, a trust expedites the process of passing on your assets, whereas, if you don't have one, that process can be rather tedious for those left behind. The probate process has been known to drag on for months and sometimes even years.

Different types of trusts

Establishing a trust involves several details, one of which is deciding what kind of trust you want to create. Below are some of the most common types.

Marital trusts

Used predominantly for ensuring that benefits get passed on to a spouse, a marital, or "A" trust places all relevant assets into a trust for when one spouse dies. After the surviving spouse passes, the remaining assets would then usually go to the heirs of the estate.

Credit shelter trusts

By putting assets into it, you can take advantage of significant tax exemptions. What happens, is that amounts up to a certain threshold are kept in the credit shelter. The remaining spouse can draw income from this. Upon their passing, the beneficiaries would receive any remaining assets, tax-free.

Charitable remainder trust

With this particular, there is a stipulated amount that goes to beneficiaries over some time with the rest going to specified charities.

Why create a living trust

As the name suggests, a living trust is when you create a trust while you're still alive. It allows you to more efficiently manage your assets and then of course accounts for what happens to those assets upon your demise. Some of the reasons that people are apt to create a living trust include:

  • Depending on how vast your assets, some people simply do not want to be bothered with the daily management of those assets. This would then put a third party in charge of handling this task.
  • Many business owners will create living trusts in the interest of protecting their business and its assets should something happen to them.
  • Some people do have to, unfortunately, deal with heirs who may demonstrate incompetence as far as managing money—this would help protect against such mismanagement should something happen.
  • In other cases, people may be worried about someone contesting their will; trust helps to ensure their wishes are adhered to.

The question of whether or not you should create a trust or living trust is completely up to you. In many instances though, it does make sense as far as protecting your assets now and after you pass. Not to mention, a trust will help protect your loved ones from a financial standpoint. That said, if you do decide to establish it, you will without question want to consult with either a financial advisor who specializes in these matters or an estate planning attorney can be helpful as well. They can guide you and direct you as far as how best to set up any trust.

First Union Lending is here to help. We've been working with small business owners for years, getting them the cash they need when they need it. If you need additional working capital, we would love to consult with you. Call today!

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