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Should I form a trust?

On Behalf of | Apr 13, 2023 | Estate Planning

What goes through your mind when you hear the word “trust”? If the idea of “trust fund babies” – individuals who are independently wealthy thanks to a trustor (often their parents) setting aside a whole bunch of cash to set their kid up for life – popped up in your head, you’d be half right.

Trusts aren’t exclusive to the rich; even middle-class individuals can establish trusts. But the question now becomes: Should you even set one up?

Creating a trust vs. leaving behind a lump sum inheritance

The idea behind a trust is that the trustor can give another party, the trustee, the right to hold assets and property on behalf of a beneficiary, like the trustor’s children. Trusts can be set up to provide the beneficiaries with funds when specific parameters are set. For instance, you can specify that the money you placed in a trust would only be given to your beneficiaries when they turn 18 or buy their first home.

If you are worried about your children recklessly spending the cash you’ll leave behind when you pass away, trusts are a safe way to ensure they get access to funding only when they most need it.

The advantages of a trust

There is more to trusts than ensuring the financial security of your beneficiaries. Here are some of their notable advantages when it comes to estate planning:

  • Saves beneficiaries from having to deal with probate: Should you die, the probate process could take several months before your beneficiaries can receive their inheritance, not to mention the amount of paperwork and expenses involved. But in a trust (specifically a living trust), the trustee can quickly transfer the assets to your beneficiaries.
  • Tax savings: When you place an asset into a trust, you don’t have to pay income tax on any earnings they generate because the asset is no longer under your name. In addition, trusts (specifically irrevocable trusts) will shield your assets from estate tax upon your death.
  • Flexibility: A revocable trust will allow you to freely adjust the terms of the agreement through amendments without court involvement, compared to wills. This will be useful in some instances, such as adding another beneficiary or changing the trustee.

In conclusion, trusts help ensure that your loved ones properly receive the benefits you leave behind when you die, and they’re not exclusive to the rich. If you have any concerns about how your children or grandchildren will fare in the future, you should consider setting up one as part of your estate planning strategy.