Father carrying son on his back

The popular perception of trust funds is that they’re for the children of millionaires. While that can be true, and I don’t want to crush your dreams of living in a mansion on the back of your best-selling series of young adult novels (maybe that’s just my dream?), it can be a useful financial tool for those of us with moderate lifestyles as well.

This post discusses how a trust fund can become a valuable estate planning tool, once you understand how trusts work. Before we get into the benefits, let’s go over the basics.

What’s a Trust?

Think of a trust a bit like a bank account. You can put all sorts of assets that have value into a trust and specify who gets what after you die.

If you think this sounds similar to a will, you’re right. There’s one major difference: A will has to go through probate (meaning your wishes can only be carried out by a judge); a trust does not.

Types of Trusts

Two major types of trusts to think about: living and testamentary. A living trust is set up during your lifetime. A testamentary trust is set up after you die based on a request in your will.

Living trusts are established as either revocable or irrevocable. You can make changes to the terms of the revocable trust and even cancel it altogether. Meanwhile, if an irrevocable trust has been set up, you can’t change it until after the wishes intended at the original setup have been carried out.

There are other specialized trusts that are set up to meet a variety of needs. One example is a generation-skipping trust: Grandparents can leave assets that stay in the trust until they reach maturity and pass these on to their grandchildren. Still other trusts can be useful if you have a more complex family dynamic. For example, if you are remarried, you can set up a trust so that money will go to your current spouse when you die and then flow to your children from a previous marriage after your spouse dies.

Structure of the Trust

The structure of a trust is pretty standard. There are three basic components.

  • Grantor: the person putting assets into the trust for their heirs
  • Beneficiary: the person(s) or organization(s) you want the benefits from your trust to go to
  • Trustee: the person responsible for the administration and distribution of your assets following your death

When you die, the trustee is responsible for carrying out your wishes in accordance with the guidelines of the trust.

What Can Go in a Trust?

This is one of the more frequently asked questions people have about trusts. Now that you know how trusts work, let’s cover what can go in them.

Here’s a non-comprehensive list, to give you some ideas.

  • Real estate
  • Bank and investment accounts
  • Stocks and bonds
  • Partnership interests

You’ll also want to set up a pour-over will to cover anything you forgot to add to the trust during your lifetime. Under the terms of a pour-over will, all property that passes through the will upon your death is poured into your trust.

Exceptions

There are a couple of things that can’t go into a trust. Transferring retirement accounts into a trust can trigger taxation because this is classified as a withdrawal. To avoid taxation at this step, consider making the trust a primary or contingent beneficiary of your retirement account when you die.

You may also be unable to transfer stock options into the trust.

Trusts are just one part of a good estate plan. You should also look at getting a living will. If you’re unable, you can designate someone to make decisions for you by setting up power of attorney.

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