A trust is an agreement between two parties, the settlor and a trustee. They may be used for many purposes nut all of them require the trustee to accept, manage and protect assets delivered by the trustmaker, administer those assets according to the trustmaker’s instructions, and distribute the income and principal only for the benefit of those that are named.
Kiplinger’s article “Trusts 101: Why Have a Trust?” explains that the trustee is a fiduciary and must act with reasonable care in administering the trust and selecting trust investments. She also must avoid any conflict of interest or self-dealing in holding, purchasing and selling trust assets, and diligently avoid breaching any of the trustee’s duties to the settlor and beneficiaries.
The trustee must follow the trustmaker’s terms. She must also be wise in making investment and administrative decisions and be objective and transparent.
Trusts can be created for several reasons, such as the following:
- To oversee spending and investments to protect beneficiaries from poor decisions;
- To avoid court-supervised probate of assets;
- To allow for privacy;
- To shield assets from the beneficiaries’ creditors;
- To keep premarital assets from a division of assets between divorcing spouses;
- To earmark funds to support the settlor, when incapacitated;
- To manage unique assets that aren’t easily divisible, such as a vacation home or a pet;
- To manage closely held business assets for planned business succession;
- To hold life insurance policies, pay premiums and collect the tax-free proceeds to care for beneficiaries, fund closely held stock redemptions or purchases and provide liquidity to the estate;
- To provide structured income to a surviving spouse that shields trust assets for descendants, if the spouse remarries; and
- To decrease the amount of income taxes or to shelter assets from estate and transfer taxes.
A trust can be set up to achieve specific goals and give tools for the trustee to balance those goals with investment and economic factors.
The most common type is a revocable living trust. It’s usually not funded until your death. It will include your instructions for how you want your estate divided among your beneficiaries and how each person’s share is managed, administered and distributed. They are flexible, so that as children grow into adulthood, you may make changes to reflect life events.
Talk with an estate planning attorney and create your estate plan with a will and a trust.
Reference: Kiplinger (June 11. 2019) “Trusts 101: Why Have a Trust?”