Mapping out a retirement plan includes making sure your hard-earned assets are protected and invested toward your goals. For more peace of mind, you can also officially ensure your wealth goes to the people who you want it to go to – and the way you want it to go to them.
One way to achieve this is by creating a trust. You may think a trust is just for wealthy people, but that’s not the case! Anyone with any amount of wealth to manage can create a trust as they plan for retirement or even beforehand.
What is a Trust?
A trust is simply a legally binding arrangement in which you put your wealth under the management of a third-party, called a trustee, who holds your assets for your benefit. It can allow your beneficiaries to access your assets more quickly than if you used a will. A trust can include assets like your investments, retirement accounts, real estate or other property like jewelry, collectibles or vehicles, to name a few.
What are the Advantages of a Trust?
For inheritance purposes, a trust is very valuable because it can save a lot of time and money with the process of transferring your assets to your heirs. Essentially, assets in a trust don’t have to go through the complicated probate process, which can take quite awhile and delay your loved ones receiving their inheritance.
Probate is a legal process in which a judge determines how to distribute your assets, including whether or not your will is valid, if you have a will. The court appoints an administrator who is responsible for ensuring your estate is distributed according to the judge’s ruling.
Avoiding probate can also save money in court fees as well the hassle.
Other advantages of having a trust include:
Having a trust provides more control over your estate because you can dictate the terms of how the third party distributes your wealth – to whom and when. For more control during your living years, you can establish a “revocable” trust that allows you to have easy access to your assets while you are alive. (We’ll talk more about these trusts below.)
When your assets go through probate, the matter is subject to public record. A trust allows your financial matters to remain private.
When you create the terms of your trust, you can protect it from people who you don’t want to directly receive a piece of your wealth, such as your beneficiaries’ creditors or a relative who might abuse the inheritance (say because of an addiction, for example).
How Does a Trust Work?
You can organize a trust in several ways, but most trusts have the same foundation of three key players: the grantor, the beneficiary and the trustee. Basically, the grantor creates a trust for the beneficiary that is managed by the trustee.
To be more clear:
The person who holds the wealth and wants to plan for how their assets will be distributed.
The person (or people) who will receive assets from the grantor. Commonly, beneficiaries include a surviving spouse and children or other family members, but the grantor can include anyone they want in their trust.
The trustee is the third-party that serves as a go-between from the grantor to their beneficiaries, ensuring that the grantor’s wishes are met, even after their death.
Downsides to Consider
In general, having a trust brings tremendous advantages that are well worth the drawbacks. Still, a trust may not be right for everyone.
Here are a few things to think about on the “negative” side of having a trust:
To establish a trust, you’ll need to hire a professional attorney to help you legally transfer your assets under a third-party’s oversight. An attorney can walk you through the paperwork process and make sure your heirs don’t encounter many setbacks with the wealth transfer.
But attorneys are notoriously expensive. Since it’s a one-time expense that can save you a substantial amount in the long-run, many people find that it is indeed worth it. Weigh the expense of creating your own trust and the specific potential cost-saving benefits against other options for transferring your wealth, like creating a will.
Like with any careful financial planning, creating a trust does take time. If you have a busy schedule, you’ll need to make an extra effort to allot time to going through paperwork.
By creating a trust, you should probably have discussions about your intentions with your beneficiaries, so they are not surprised by any asset distributions after your death. Having honest talks about a difficult subject can bring everyone a sense of security and clarity. It can also help everyone avoid any confusion or conflicts down the line.
Because most people are not subject to estate taxes, which typically only apply to very large amounts of wealth, trusts don’t usually bring the benefit of saving you on estate taxes, as some might assume. If you do have a large estate, you could potentially save here though. To better understand how estate tax laws affect your situation, you can work with a financial advisor who can shed light on potential tax savings of a trust, if any.
Two Types of Trusts
When you create a trust, you can either establish a “revocable trust,” which is also called a living will, or an “irrevocable trust.” Which type of trust is best for you depends on your goals and circumstances.
These trusts allow you to change the terms at any time while you are alive and can make decisions. That includes making changes to beneficiaries or including or removing different assets.
As the name implies, once you establish an irrevocable trust, you can’t take it back. Irrevocable trusts are permanent as soon as you put your assets under the supervision of a third party. Technically, the trust then owns your assets.
The Bottom Line
Addressing how your estate should be handled after death is a responsible part of financial planning, especially if you are in or near your retirement years. Weigh the pros and cons of creating a trust with a professional financial advisor who can help shape the right path for your assets.
Here’s to the Wellness of Your Wallet!