Forming a trust can seem like a daunting or unnecessarily complicated task, but its benefits often outweigh the paperwork and added tax complexity. Trusts are customizable to your specific situation and can help you protect your assets, establish an estate plan, direct how you will ultimately distribute your wealth and more.
What questions should you ask yourself — and ultimately discuss with your attorneys and tax advisers — when thinking about forming a trust?
Arguably the most important question: why do you need a trust and what goal will it help you, the grantor of the trust, accomplish? Trusts are useful tools that can help when planning for education, charitable contributions, family members with special needs, asset protection, Medicaid and your estate. Determining the why your trust should exist will help determine what type of trust fits best for you — whether you are planning for cash needs currently or estate and tax planning in the future.
In determining why you need a trust you may have already thought through who will benefit from the trust. The beneficiary of your trust could be your spouse, children, other family members, close friends, a charity, your estate or a combination.
Why you need a trust and who your beneficiaries are will often dictate what kind of trust you need, including the benefits and distribution options. Trusts are customizable, so you can have one for your beneficiary and still reserve the right for them not to receive benefits or distributions until a certain age or life event. Since the trust is a legal document, your wishes for the beneficiaries will stay in place long after your death.
The administrator of trusts are called trustees. The grantor of the trust can dictate who is the trustee of the trust, and who will be the trustee after that individual (or individuals) is no longer able to serve. In some cases, the grantor is able to act as the trustee, but in most cases the grantor will choose either a spouse, close family member or professional trustee. There are advantages and disadvantages to each type of trustee, but as the grantor you can pick the individual or combination of individuals that makes the most sense for your situation and trust.
Finding the right assets to fund your trust can be a bit like putting together a puzzle. Depending on the age, beneficiary and overall goal of the trust you may want assets that hold or increase their value overtime, or assets that provide a steady stream of cash to be distributed to your beneficiaries. Funding your trust with assets like life insurance, real estate or assets that will appreciate in the future can be helpful to estate planning or wealth transfer planning.
If you decide on forming a revocable trust, your tax situation will remain fairly simple and you retain the ability to change or modify your trust agreement at any time. If you create an irrevocable trust, you will be locked into the trust agreement for as long as they trust is active and, in most cases, will be unable to change the terms of the trust. Generally, an irrevocable trust is its own tax entity and will require its own tax return to be filed. Either way, typically the benefits from a trust will outweigh the inconvenience or complexity they create.
These five questions will help build the foundation for your future trust planning. Knowing what you want to achieve with your financial and generational planning will help you work with your attorneys and tax advisers on creating the best plan for you.
Contact Rachel Roan at firstname.lastname@example.org of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.
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