The Purpose of a Trust & Why You Might Need One

Why It Matters:

  • The purpose of a trust is to reduce estate taxes and seamlessly transfer assets to heirs.
  • There are different types of trusts, but two main types are living and testamentary (which kicks in after death).
  • Trusts can be very complex legal documents, so get help from a qualified estate planning attorney.

Everplans tkc.profilePicture Written by: Everplans
Nov. 30, 2017

8 Min readClock Icon

Simply put: A trust is a legal arrangement in which a certain amount of property or assets is held by a person or entity (e.g. bank) for the benefit of one or more other people. This allows you to reduce estate taxes, avoid probate, and seamlessly transfer your assets to your heirs.

Why would you create one?

       •   To maintain control of assets (via a trustee) if you become unable to manage your assets due to a decline in health or mental fitness.

       •   To save on estate taxes if your estate is more than $5.6 million (for individuals in 2018, or twice that for married couples).

       •   To avoid probate.

       •   When significant amounts of assets are involved, trusts may also be established to maintain control over assets even after the original owner has died. For example, a trust may be set up with the sole purpose of paying college tuition for a grandchild. In this scenario, the money in the trust cannot be used for any purpose other than paying college tuition and cannot be used on behalf of anyone other than the grandchild.

Determine the type of trust you need

Trusts can accomplish a range of goals, including avoiding probate, reducing estate taxes, and making sure your heirs receive as much of your money as possible as quickly as possible. The type of trust you set up will depend on your goals.

Hire a qualified estate planning attorney

There are many online legal services that can help you create a trust. However, since trusts can be incredibly complicated, you may want to consider working with a trust and estate attorney to make sure the job gets done exactly as you want it.

The four main participants in a trust

       1.   Grantor: the person who creates the trust (also known as “donor,” “settlor,” or “trustor”).

       2.   Trustee: the person, people, or entity (such as a bank) that agrees to hold the property or assets (the grantor may be the trustee).

       3.   Principal: the property or assets themselves, including money, which is held in the trust and managed by the trustee. It’s also known as the trust corpus.

       4.   Beneficiary: the person or people who receive or benefit from the property or assets in the trust.

Tax implications during your life

With a revocable trust you are still treated as the owner of the property in the trust and can therefore be taxed on that property during your life. With an irrevocable trust, you give up ownership of the property in the trust and are therefore no longer liable for that property and cannot be taxed on that property.

However, a trust itself is a legal entity subject to taxes on the property it holds. Tax brackets for trusts are compressed, so relatively small amounts of income will push the trust into the highest tax bracket.

About trustees

Trustees are responsible for managing, investing, and distributing the property in the trust. This includes administration and accounting, paying any taxes on behalf of the trust, working with beneficiaries to determine their goals for the trust, and working fairly and with transparency around issues of management, investments, and distributions.

Managing trust assets

The trustee is responsible for the accounting and administration of the trust. This includes preparing and filing income tax returns for the trust, paying those income taxes from the trust, and adhering to any and all applicable state and federal laws around trust administration. The trustee must also keep accurate records of all transactions.

Investing trust assets

The trustee is responsible for investing the trust assets so those assets earn income for the beneficiaries. Depending on the needs of the beneficiaries, the trustee is responsible for determining whether to invest the principal to earn income, to grow the principal in the trust, or other goals that the beneficiaries might have.

Distributing trust assets

The trustee must follow the instructions of the trust in distributing income or property to the trust's beneficiaries and must make these distributions in a timely and responsible manner.

Who can serve as a trustee?

The trustees of your trust can be you, your family members or friends, professionals (accountants, attorneys, etc.), a bank or a trust company, or any combination of these. (Learn more: Duties of a Trustee)

Successor trustees

If you’re naming only a single trustee, you’ll want to be sure to name at least one successor trustee. In case the primary trustee you name isn’t able to serve, the successor trustee can step in. Remember a trust does not fail for the lack of a trustee.

If you’re establishing a revocable trust, you’ll likely name yourself as the sole trustee.

How to choose trustees

These are the qualities you want in your trustee:

       •   Attention to detail.

       •   An understanding of the duties and a commitment to taking those duties seriously.

       •   An understanding of finances and perhaps investing, accounting, or law.

       •   Good communication skills.

       •   Alignment with your morals and values.

When choosing trustees, it's important to think about the structure and goals of the trust and the specific requirements of the trustees of that trust. While some trusts may require trustees with extensive experience in investing or accounting, other trusts may benefit from trustees who have close personal relationships with the beneficiaries or the grantor.

In some cases, the person best suited to be a trustee may not be your closest friend or family member but instead may be a friend or colleague you believe to be competent, honest, and intelligent. You may also appoint someone close to you to act as a trustee and specify to that person that you would like him or her to hire professionals to advise on certain aspects of the process.

Appointing a professional as a trustee

If you don’t feel like you have anyone in your personal life to entrust with the role of trustee, you could appoint an entity that you have a relationship with, a bank, or a trust company. These entities may require a fee for their services as a trustee.

The end result: beneficiaries

Beneficiaries of a trust are the people or organization(s) who are named as the recipients of any benefits of the trust. The beneficiaries can be anyone you like but will usually depend on the goals of the trust.

Choosing beneficiaries of a trust

If you're setting up a trust that’s intended to avoid probate and seamlessly transfer assets to your family, you'll likely want to name your family members as the beneficiaries. A trust that’s intended to provide support for a charitable organization will likely name the charity as the beneficiary.

Beneficiary distributions

Based on the goals of your trust and the number of beneficiaries you name, you can decide how you would like those beneficiaries to receive distributions. For example, if you have three children, you may name all three of your children as equal beneficiaries or you may name them as unequal beneficiaries, with each child receiving different distributions from the trust.

Descendants

You may also decide whether or not the beneficiary designation applies to linear descendants − that is, whether or not your children’s children would become beneficiaries in the event that one of your children should die before the assets in the trust are fully depleted.

This article is provided by Everplans — a life and legacy planning company dedicated to transforming the way people get their families organized. For more information, visit: everplans.com

Neither Transamerica nor its agents or representatives may provide tax, investment, or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors and financial professional regarding their particular situation and the concepts presented herein.

Things to Consider:

  • What is the purpose of your trust and how can it help you? Is it to avoid taxes, pass assets seamlessly to heirs, or something else?
  • It’s important to decide the type you will need − mainly, living vs. testamentary and revocable vs. irrevocable.
  • Creating and managing a trust can get very complicated, so it’s best to work with a qualified estate planning attorney.
  • Aside from naming yourself as a trustee, you may also name family members, friends, associates, or hire a professional.

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