Popular conception of a trust fund beneficiary is the heir to a fortune. Plenty of them do, in fact, have trust funds but you don't have to be rich to set one up.
The main reason to establish a trust is to ensure assets are transferred to someone else in keeping with your wishes. While a will can do the same thing, a trust can actually do the transfer while you are still living, if the conditions you set out are met.
Even if you aren't rich, if you are contemplating a trust fund you most likely have been able to save some money or produce some significant assets. You may want to set up a trust because the beneficiary isn't quite as financially savvy as you are. You may have made the judgment that it would be a mistake to give them a large sum of money all at once.
People also set up trusts for tax reasons. In some cases, the assets in the trust can grow but the growth does not result in higher taxes for you.
Revocable and irrevocable
There are revocable trusts and irrevocable trusts. With a revocable trust, you can change the terms once it has been established. With an irrevocable trust, once it's set up you can't change it. The assets in the trust fall outside your control.
Why would you agree to that? You might because the assets that are in an irrevocable trust are no longer part of your estate. That might be important when you die and your estate is over the now-lower limit for the death tax.
Assets you place in a revocable trust still belong to you and, as such, are part of your estate. If their value nudges you over the limit of a tax-free estate, your heirs will owe death taxes.
But if your estate is well under the limit, you don't have that concern an a revocable trust might be a good option.
Estate tax uncertainty
Attorney John O. McManus, founding principal at McManus & Associates, says there was a rush to create trusts before the end of 2012 because of uncertainly over tax laws. It turned out changes were mostly minor, but McManus says people considering a trust shouldn't delay.
"Less than six months ago, many of our clients put assets into trust and have enjoyed appreciation in the trust assets of 20 percent in cases where they chose the most aggressive portion of their personal portfolio to deposit into trust,” he said. “Now those who funded the trust with $5 million have $6 million, an additional $1 million free of state and federal estate tax."
Naturally, there are costs associated with setting up any kind of trust. The legal assistance required to properly do it is specialized and tends to be expensive. Before heading down that road, it might be wise to first have a conversation with your accountant about whether its needed or not.
Trustees and beneficiaries
As the name implies, a trust is administered by a trustee. A trustee may be an individual or a company. It controls the assets and has a fiduciary responsibility to the beneficiary.
The beneficiary, the person or entity that will eventually receive the assets, may be entitled to income from the trust for a period of time before they receive all the trust's assets.
If estate taxes are not a concern, a revocable trust gives the grantor the most flexibility. With a revocable trust, you can even cancel the entire arrangement if circumstances change. If you aren't among the super rich but think you could benefit from a trust, this could be the way to go.