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When Trusts Make Sense

Historians can tell you that the concept of holding property and other assets “in trust” started in the 12th and 13th centuries when nobles went off to fight in the Crusades. In their absence, they turned over their property to a trustee for beneficial handling.

Trusts can play an important role in both lifetime financial management and estate planning efforts. Use of a trust can provide control of property or assets for an extended period of time while also transferring ownership through the terms of the trust document.

Controlled by each state’s laws, a trust is formed when a trust document is signed by the grantor, the person transferring cash, stocks, real estate or other assets to the trust’s ownership. The terms of the trust govern who will serve as the trustee, the person or financial institution which will manage the assets for the benefit of the trust’s beneficiaries. The trust agreement outlines the trustee’s responsibility for handling and investing the trust assets and paying income to specified persons.

Trusts which begin to operate during the grantor’s lifetime can be set up on either a revocable (can be changed) or an irrevocable (cannot be changed) basis. Trusts created through the terms of a will are irrevocable.

In the typical estate planning situation, a trust will provide for the transfer of assets after death, management of the assets by the trustee, and payment of income to the surviving spouse for life. At the second spouse’s death, the assets in the trust can be distributed to the children outright or the trust can continue to pay income to them for their lifetime with distribution of the assets afterward to others.

There is also the option of creating trusts to provide future income for children or grandchildren who may not be adept at financial matters. The provisions can assure that funds for financial and medical needs will be available, thanks to professional management of the trust assets. The trust assets can be protected from the income recipient’s creditors through spendthrift provisions. Those terms block a creditor from being able to remove the assets from the trust, but a creditor can be authorized to receive the trust income in place of the recipient until the debt is paid.

Trusts for minor children or grandchildren can also provide funds for higher education. As an alternative, state-operated saving programs for college expenses (called “529 plans”) can be a smart direction for this type of planning.

An additional benefit of trusts can be the financial protection of a person with special needs who also receives government program benefits for the majority of their financial needs. A special needs trust can provide extra funds for expenses not generally covered by those government benefits, such as personal travel, certain medical expenses, and other quality-of-life needs.

Further, charitable trusts can pay income to specified persons and yield future support for favorite nonprofit organizations. A tax-exempt charitable trust operates without paying income taxes on its assets, allowing more flexibility in investing and permitting the assets to grow more over time.

Guidance in determining the type of trust needed and the steps involved is available through attorneys and financial institutions with trust departments.


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