- Written by Patrick Hicks Patrick Hicks
As we age, we naturally think more frequently about how we plan to pass on our property to our loved ones, whether it’s a spouse, children, or grandchildren. After all, you’ve spent decades building a legacy, and you likely want to retain that legacy within the family as much as you can.
The process of estate planning can be tricky because you want to make the choices that will best protect your assets and your loved ones. One of the main choices you will face will be getting a will, a trust, or both.
What is a Trust?
A trust is a fiduciary agreement that allows one person (the “trustee”) to control property provided by another person (the “trustor” or “grantor”). The trustee is charged with the duty of managing the trust, and any distributions, in the best interest of the beneficiary.
When setting up the trust, the grantor is responsible for designating instructions for how the trust should be managed and how assets should be distributed.
Trust vs. Living Trust
In general, trusts come into effect upon the grantor’s passing. This means the trust is irrevocable or that it cannot be changed or modified.
In contrast, you can also set up a living trust, which is one you set up during your lifetime. Living trusts are revocable, meaning you can change the terms at any time.
Living trusts are a great option if you prefer to have some flexibility and think you might need to make any changes during your lifetime. You can also set it up in such a way that you can access property and assets placed in the trust while you still need them.
Pros & Cons of a Trust
Both wills and trusts are important estate-planning tools. A last will and testament designates how your property should be divided and distributed to beneficiaries upon your passing.
Trusts essentially hold the same function, but they offer additional protections that are worth consideration.
Pros of a trust include:
- Avoiding probate – Avoiding probate proceedings is arguably the largest draw for most families. Upon your passing, property held within a trust will not be subject to probate court. This will save your family time, money, and frustration.
- Simple and flexible – Contrary to popular belief, trusts are not difficult to set up. If you go with a living trust, it will also offer you flexibility. You can add to it or modify it at any time.
- Limits estate taxes – Because assets held within a trust are owned by the trust itself, some tax benefits will kick in. For example, you can help limit your estate taxes.
- Keeps family matters private – Estates that pass through probate court become public information. If you wish to keep your personal matters private, you might want to consider setting up a trust. Bypassing probate court means that your matters won’t be publicly available.
Cons of a trust include:
- Potential loss of flexibility – A living trust does offer flexibility, while an irrevocable trust does not. Once you set up an irrevocable trust, you cannot revoke it or modify it. A living trust is recommended if you prefer retaining flexibility, although an irrevocable trust offers added tax benefits.
- Ongoing costs and fees – In addition to the cost of setting up the trust, you may be subject to ongoing costs to maintain the trust, as well as fees paid to the trustee for managing the estate on your behalf.
How to Set Up a Trust
Setting up your trust just takes three steps:
1. Draft your trust agreement – First, you’ll need to create a draft of your trust agreement. This document should list out all the assets that will be held in the trust, as well as the names of all your beneficiaries.
You’ll also need to think about who you will name as your trustee, and create detailed instructions on how you want your property managed and distributed. You can make the terms of your trust yours; you can be as detailed or general as you’d like.
2. Set up the trust fund – Next, it’s time to set up the trust with an estate-planning attorney.
3. Place assets into the trust – A final and critical step is funding your trust. You’ll do this by transferring property and assets into the trust so they are then owned by the trust. It’s helpful to contact your financial institution and ask what documents they’ll need to make this happen.
How to Distribute Trust Assets to Beneficiaries
How your assets are distributed depends on the rules you set for your trust. Your trustee could distribute property or assets directly to your beneficiaries outright and without any restrictions. This could take the shape of a check, cash, or transfer of real estate.
Alternatively, you could instruct the trustee to disburse assets over time. For example, you could instruct the trustee to wait until your beneficiary reached a certain age or milestone. You can also instruct that the assets are released over a certain time period, such as on a monthly or annual basis.
Setting up a trust fund is a smart choice for many families. If you feel stuck choosing between a will and a trust, know that you can do both. In fact, many individuals successfully create an airtight estate plan by setting up both a will and a trust, which can work in tandem.
Patrick Hicks is the head of legal for Trust & Will (trustandwill.com), the leading digital estate-planning provider in the U.S. offering affordable, customizable estate plans for all 50 states.