Trusts are an increasingly common tool in the
financial planning world. The question is when should you consider using a
trust. Here are some basic, and by no means complete, guidelines on when you
may want to look at starting a trust.
Estate Planning: This is far and away
the most common area where trusts are used. For the most part these trusts are
set up with the assistance of an estate attorney while doing comprehensive
estate planning.
Living Trusts, established along with a Will,
can be exceptionally useful in making the estate settlements easier, cheaper
and less taxing on the Executor. For those with small and/or very simple
estates a Living Trust may be unnecessary, but as your net worth grows and
your desires for asset distribution become more complex, a Living Trust should
be on your radar screen.
Springing Trusts, are trusts that "spring" to
life upon some event, in this case the death of the donor. These trusts, in
various forms, are most frequently used to allow for the needs of minor
children and to potentially minimize estate taxes while still providing for a
surviving spouse. Trusts that are established as part of an Estate allow the
deceased to specify not just the distribution of assets but also how and/or
when they are used. This can be especially helpful if there are family members
who are either too young or too irresponsible to handle large sums of money.
Charitable Trusts, come in a variety of forms
but in general allow the donor to provide for both a charity and one or more
individual beneficiaries, often in a very tax efficient manor. These are
particularly useful when the estate is large and the beneficiaries older.
Income Tax Planning: For the wealthy, many tax
avoidance strategies involve the use of trusts. Even the not so wealthy can
benefit from the use of trusts.
UTMA/UGMA Trusts, or the Uniform Trust(Gift)
for Minors Act, are probably the most common trusts and can frequently be set
up without the assistance of an attorney. They allow a parent or grandparent
to put money aside for the benefit of a minor child. The donor can retain
control of the money, as long as it is used for the benefit of the minor,
until the beneficiary becomes of legal age. Besides getting the assets out of
a larger estate, depending upon the relative tax rates, it can also save on
income taxes.
Tax Shelter Trusts, of various types are
frequently used in tax avoidance schemes. Some can be simple and benign while
others can be complex and risky. If you are going to consider these types of
tax shelters I very strongly recommend you look closely at the both the costs
and risks and consider hiring skilled tax advice beyond that provided by the
group offering you the tax shelter plan. A good third party consultant can
frequently point out risks that are not always completely disclosed. These
types of trusts are usually easy to start but also extremely difficult, if not
impossible, to undo if you change your mind later (or the tax law changes).
Special Needs: Trusts can be extraordinarily
helpful in providing for family members who have special needs. Besides
creating a device to help carry on after the death of a provider/caregiver, a
properly designed special needs trust can be very useful in helping to
maximize eligibility for government assistance. If you are considering
establishing a special needs trust it is critical you get legal advice that is
specifically skilled in such trusts.
Trusts can serve a great many purposes but they are
not for everyone. Depending upon their complexity, trusts can be expensive to
set up and administer and if irrevocable, generally can not be undone. Don’t
establish a trust without thoroughly thinking through why you need it in the
first place and what its intended purpose will be. Also, remember that in
almost all cases you will need good legal council to establish your trust.
When in doubt, get advice from a professional.
Please feel free to call me if you have any
questions about this or any other related topics.
Randy Gridley
September, 2006
