When you’re planning a way to pass on inheritances or protect your assets, one of the options you may select is to create a trust or multiple trusts to do so. It is necessary to understand the basics of how a trust works to make sure you set it up to be as protective as possible.
Trust funds allow you to set aside certain assets, like investments or cash, for the benefit of your beneficiaries. You put assets into the trust and place them into the control of a third-party trustee.
This trustee maintains and distributes the trust in accordance with your wishes. For example, if you want to distribute your assets when you pass away, then the trustee will have these instructions and do so based on the exact specifications you made.
2 kinds of trusts may protect your assets
There are two main kinds of trusts, revocable and irrevocable. Irrevocable trusts can’t be undone, so you must be positive of the terms before you establish them. Irrevocable trusts hold assets outside the estate, which can help you save on taxes and avoid probate.
Revocable trusts don’t work quite the same way and do allow you to change them at any time. You are considered the owner of the trust, and your assets are subject to estate taxes.
As the grantor, you establish when the trust pays out
You can decide when a trust pays out. It doesn’t have to be after your death.
You can decide that the trust pays out on your child’s 18th birthday, for example, or that it will pay out when they get married or get their bachelor’s degree. So, plainly put, the trust can pay out at any time. However, you may want to stimulate that the trust only pays out after your death if you want to make sure that the assets contained within it have time to grow or stay in your possession until that time.
It’s worth thinking about how a trust could help and deciding if it’s right for you when setting up an estate plan. Trusts can be beneficial, but they are just some of the options open to you when you want to pass on assets.