5.5 MIN READ
As you plan your estate, you may want to consider whether personal trusts are right for you. Many people assume they are only for the wealthy, but anyone can use them. A trust protects your assets from creditors and ensures your beneficiaries receive the money or assets you intend for them to receive upon your passing.
Read our guide on personal trusts, how they work, and who should consider them below.
Related Article | The Finance Dictionary: Learn the jargon your Finance friends speak!
What Are Personal Trusts?
Personal trusts are a financial agreement between three parties: the trustor (you), trustee (the person or entity managing your assets), and the beneficiaries. When you set up a trust you give someone else, or another entity control of your assets. It’s their job to protect them until you pass away, and then it’s their job to make sure your assets reach the right people according to your instructions.
How Do They Work?
When you open a trust, you fund it with your assets. Assets could be your house, investments, or even bank accounts. Any assets you put into the trust become the property of the trust, not you any longer.
Depending on the type of personal trust you have (more on this below), you may or may not be able to make changes. If you can’t make changes, you’ll only want to place assets in it that you don’t think you’ll need and only want to save as a part of your estate.
Some personal trusts keep your assets away from creditors since they aren’t in your name. This shields these assets from any lawsuits or other financial obligations that could take away your assets.
When you find the trust, you change ownership of the asset. For example, if you put your home in the trust, you no longer own it, but the trust does. The bank will have the mortgage deed changed so it shows the trust of the owner. If you want to refinance or sell the home, you’ll have to take it out of the trust temporarily.
Related Article | Jackie O Trusts: A Win-Win Estate Tax Reduction Strategy
Types of Personal Trusts
There are two main types of trusts - revocable and irrevocable. The names speak for themselves, but we’ll look at them in detail below.
In a revocable trust, you can make changes to the trust as you want. You set the trust up one way, but if life changes and you want to add more assets, remove assets, or change beneficiaries, you can. You can also cancel the trust at any time.
Upon your death, the trust becomes irrevocable, which means no one can change it. This is done to protect your estate so no one can make changes after your passing.
Most revocable personal trusts are owned by the trustor (you) but have a successor trustee named for when you’re unable to make your own decisions or pass away. A revocable trust doesn’t avoid probate taxes, which only occurs if the estate is worth more than $11.7 million. If you think your estate is worth more than that amount, you should consider an irrevocable personal trust.
Irrevocable Personal Trust
An irrevocable personal trust cannot be changed. Once you put the assets in a trust, they stay there until your passing. But the irrevocable trust removes these assets from your estate and doesn’t affect the estate’s value or tax liability.
Even while you’re alive, any assets in the trust (investments) don’t incur a tax liability even if you have capital gains. Because the trust isn’t in your name and you aren’t the trustee, you don’t owe taxes on it.
It’s important to choose the irrevocable trust carefully though because once you set it up, you can’t change anything.
Who Should Be Trustee?
Choosing a trustee is a big decision. If you have an irrevocable trust you must pick someone other than yourself and if you have a revocable trust you’ll need a successor trustee to take over upon your passing.
Who you should choose is a matter of personal decision, but consider the following:
- Choose someone you can trust with your finances - they’ll have access to your entire trust and even the investment decisions within the trust
- Choose someone who can handle your beneficiaries and treat them right upon your passing
- Choose someone who can handle the complex nature of handling the trust including distributing the assets
Related Article | Trusts 101
Pros and Cons of Personal Trusts
Personal trusts have good and bad sides. Understanding both can help you determine if it’s right for you.
- Avoid probate - Since you aren’t the owner of the assets in a trust, upon your passing the assets can be distributed to beneficiaries without going through probate like any assets, not in your trust would go through.
- Quick takeover - If you name a trustee to take over when you’re incapacitated, there are no court appearances required or delays in executing the trust. The successor trustee takes over right away and fulfills your wishes.
- Privacy - Any assets you own that are in the trust aren’t public knowledge. This helps upon your passing because nosy relatives or friends won’t know what you owned since the assets won’t be in your name.
- May reduce your estate’s tax liability - Depending on the type of trust you open, you may lower your estate’s tax liability, allowing your beneficiaries to have more funds rather than facing tax liabilities.
- Time-consuming - Setting up a trust can be time-consuming and overwhelming. There are many decisions to make including whether you should have an irrevocable or revocable personal trust. You’ll also have to change the deed and/or ownership of any assets you transfer to the trust.
- Only an irrevocable trust provides protection - If you’re worried about creditors taking over your estate, only an irrevocable trust will protect your assets. But an irrevocable trust doesn’t allow you to make changes which can be a hassle.
- Can be expensive - It costs money to set up a trust and then you have to fund it or it’s pointless. If you compare the cost of trust to the cost of a will plus probate, though, you may find that they come out about the same.
The Bottom Line
Personal trusts are a great way to protect your assets and prevent your estate from going to probate. Even if you aren’t worried about your estate’s tax liability because you own less than $11.7 million, there are still benefits to setting up a revocable trust.
The privacy and protection of trust are often reasoned enough for anyone to open a trust. If you aren’t sure if your estate is worth a trust, let us help you. We’ll discuss your various options, the pros and cons of each, and how to handle the trust if you decide it’s right for you.