I am not an attorney and this article is only intended to explain the term “Trust” in plain English, and should not be replied upon as me offering any legal advice in slightest attempt.  Please discuss your individual unique situation with an estate planning attorney.

What is a Trust?

Have you heard of it often enough to pique your interest?  What is your understanding of a Trust?  Only rich people have the needs to set up a Trust?  Or Trust is for those who want to control his/her wealth from the grave?  

Why set up a Trust?

There are a few possible scenarios listed below:

* If one wants to ensure his/her children from the first marriage receive their fair share of wealth accumulated before second marriage, one could accomplish this wish by setting up a Trust to specify as such.

* If one’s children are unable to make decisions, are not trusted to make wise decisions, one hopes not to have his/her son/daughter in-law to divide the wealth in the unfortunate (or fortunate) event of a divorce, or one wants to prevent any claims from his/her children’s creditor(s), a Trust could be established for these circumstances as well.

* If one plans to receive income form his/her wealth during life time and to leave the remainder to his/her heirs (either children or charity organizations), another type of Trust would fit the bill.

* If one would like to live in his/her own house, but needs to tap into Medicaid benefits, there is a Trust for it.

Have you got a rough idea from the above different situations?

  • You as an individual could transfer you assets into a Trust for various purpose(s)
  • There are different types of Trusts to meet individual needs
  • Various assets could possibly be transferred to Trusts, such as: cash and/or house (some where in between are: stocks, bonds, CDs, retirement accounts, annuities and life insurances, to name a few)

How to set up a Trust?

The provisions of a Trust are usually drawn up by attorneys.  Can you change your mind after it’s all said and done?  Some could; some couldn’t.  This is one of the important factors when deciding which entity should pay income taxes and whether the assets could be excluded from one’s estate.

Taxes Implication from setting up a Trust

In addition, depending on the assets being transferred into the Trust, applicable income taxes will apply.  Then question is then who will be picking up any income taxes generated from the assets within the Trust?  The income could be: interest income, dividend income, capital gain/(loss), etc.. and with specific tax laws applied to each of them.  Please consult your tax advisors (ideally your CPA or yours truly).

Would these assets be excluded from your estate? With more than one factor to consider and again please discuss with your trusted Advisor (your estate planning attorney, CPA hopefully, or feel free to contact me)

Terminology

Let’s talk about the “terminology” commonly referred to in a Trust.

The person who creates the Trust and transfers his/her assets into it is called a Grantor.  Grantor decides the purpose of and put assets into the Trust.  Grantor also decides who the Trustee is.  Trustees is empowered to manage the assets held within the Trust; the Trustee’s duties include but not limited to: keep track of Trust’s income and expenses, decide where to invest Trust’s assets, distribute income or principal to the beneficiary, etc..  The person who receives the “benefits” of the Trust is called a Beneficiary.  The Trustee has fiduciary duty to the Beneficiary.

Trustee’s responsibility is important and time consuming; Trustee is then being compensated accordingly.

Fees

Legal Fees for attorney to set up a Trust, professional fee paid to a CPA to prepare returns.  If the “benefits” outweighs the expenses, then it might be worth the effort.  (You will be the judge of it since it is your money.)

Disclaimer:

To the best of my knowledge and effort, I wrote this article in general terms as each person’s situation differs.  Tax laws do change from time to time.  No guarantee is made or claimed through this article.  Personalized advice is recommended to consult’s one’s own advisor or contact the author.

 

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