For many people, making sure their loved ones will be financially secure after they’re gone is a primary objective and a trust fund can help achieve this goal. Trust funds are common estate planning tools that help high-net-worth individuals pass an inheritance to their children and grandchildren. They can hold several kinds of assets, such as money, real estate, and investments.
When you establish a trust, you’re creating a legally-binding plan that stipulates how your wealth will be distributed after your death. There are three key parties in a trust relationship:
- Grantor: This is the person whose wealth is held in trust.
- Beneficiary: This is the person or people who receive a distribution of assets from the trust after the grantor’s death.
- Trustee: This is the person or entity that carries out the terms of the trust.
Before establishing a trust of your own, there are several considerations to make. Here are some of the primary things you need to know.
1. Decide How You Want to Distribute Your Wealth
When you set up a trust, you’ll need to decide how you want to distribute your wealth to your beneficiaries — whether those are children, grandchildren, or other loved ones. As the grantor, you can choose to give each beneficiary their inheritance as a lump sum or send it out in phases. While a lump sum may be the simplest method, some financial experts think it unwise to give beneficiaries a large amount of money all at once, especially if they’re fairly young when they receive it.
With a phased approach, beneficiaries receive distributions over time — perhaps every three, five, or ten years. Additionally, a phased approach can be tied to specific milestones. For example, a child may receive a distribution when they graduate from college and another when they buy their first home.
A third alternative is to leave it up to the trustee to decide when the funds are distributed to beneficiaries. This method cedes a good deal of control on the grantor’s part, but it may be advisable in certain cases, such as if the beneficiary struggles with addiction or has a health condition that affects his or her judgment.
Grantors may also opt for a combination of lump-sum and phased distributions by disbursing a portion of a beneficiary’s inheritance outright, and then holding back the remainder for a set number of years. This can help beneficiaries with expenses later in life, such as those for retirement or their child’s college tuition.
As the grantor, you can choose to involve your children or other beneficiaries in these conversations and seek their input on how they want to receive their inheritance. But ultimately, it’s your money and you get to allocate it as you see fit.
2. Decide if You Need a Revocable or Irrevocable Trust
If a trust is revocable, it can be revised or canceled altogether by the grantor. In contrast, an irrevocable trust can’t be altered or canceled without the permission of the trust’s beneficiaries. If you want to exercise more control over your assets, you may want to establish a revocable trust. But if you want your assets to be protected, an irrevocable trust may be best.
When you move your assets into an irrevocable trust, they are removed from your estate. This means they will not be subject to the estate tax after you pass away. And if you’re in a high-risk profession or industry where you may need to worry about lawsuits, an irrevocable trust can protect your assets from seizure.
3. Choose the Right Trustee
A trustee is an appointed entity or individual who is responsible for disbursing your assets upon your death based on the terms you have stipulated in the trust document. It’s a big responsibility, so think carefully about who your trustee should be. It’s often recommended to try to take the emotion out of the decision and look at your choices objectively.
You’ll likely want to choose someone who is in good health and exercises sound judgment. Consider how old they are now and how old they’ll be when your children gain control of the trust. You should also think about how much discretion you want to give the trustee over the disbursement of funds.
4. Review the Trust Annually
Once you’ve created a trust, make sure you set aside time each year to review its provisions. The only constant in life is change — and if your trust is outdated, it can make things more difficult for your beneficiaries. As your children get married, get divorced, or have grandchildren, you’ll likely want to update your list of beneficiaries. You’ll also need to revise your trust plan if someone dies in your family, whether it’s a child, spouse, or trustee. Taking the time to ensure that your trust is accurate and up to date can help save significant time, money, and emotional turmoil down the road.
Get Inheritance Planning Assistance from a Financial Specialist
If you’re planning on setting up a trust fund, make sure you’re receiving advice from a qualified and experienced financial advisor. At Park Place Financial, we help individuals and families draft several types of trusts, including:
- Living trusts
- Insurance trusts
- Special needs trusts
- Charitable trusts
Our financial advisors guide clients through their estate plans, showing them how this aspect corresponds with their overall wealth goals and objectives. We also have a Certified Financial Planner and licensed attorney, Christopher J. Maurer, who has the authorization to draft legal documents for clients.
We are primarily fee-based fiduciaries who are based in Bellaire, Texas and serve clients throughout the country. To schedule a complimentary financial assessment or learn more about our inheritance planning services, contact us today.