Financial Focus: When Do You Need a Trust?

Financial Focus
When Do You Need a Trust?

None of us can predict the future - so if you want to make sure your family and other heirs receive what you want them to have, it's not too soon to do your estate planning. Trusts can be a key part of those plans. But under what circumstances might you need to establish a trust?
Before you choose a specific trust, you'll need to know how trusts work. Usually, a trust is a legal arrangement in which you, as grantor, set up the rules and appoint a trustee, who manages the trust and its assets. You (and possibly others) then fund the trust with assets. The trustee collects these assets and invests the money according to the rules of the trust, which will also determine the trust's beneficiary - the recipient of the trust's proceeds.
Beyond these common traits, trusts can be very different in their intended purpose. Your individual situation will dictate the type of trust, or trusts, you choose. Here are a few of the most common scenarios:
If you want to give something to charity...You may want to consider a charitable remainder trust (CRT). In a CRT, you donate an appreciated asset, such as shares of stock or a piece of real estate, to the trust. The trustee may then sell the asset and use the proceeds to purchase a portfolio of securities. From these investments, you can receive an income stream for life; upon your death, the charitable organization receives the remainder of the principal. By setting up such a trust, you defer capital gains taxes, and you can claim a limited deduction on your income taxes.
If you want to reduce estate taxes ... Explore an irrevocable life insurance trust. If you own an insurance policy, the proceeds are a part of your taxable estate. To help reduce the possibility of your heirs having to pay estate taxes, you may want to establish an irrevocable life insurance trust. As long as the trust owns the insurance policies, the proceeds won't be included in your estate. You might also be able to use an irrevocable life insurance trust to provide your family with assets they might not otherwise have received, especially if you've given away a sizable amount to a charitable organization through a charitable remainder trust.
If you have remarried... You may want to think about a QTIP (Qualified Terminable Interest Property) Trust if you're married for a second time, but want to make sure your children from your first marriage are protected. A QTIP trust enables you, as grantor to provide for your surviving spouse and also maintain control of how the trust's assets are distributed once he or she also dies.
If you want to protect children/grandchildren from spending their inheritance too quickly - If you think your children or grandchildren might "burn through" the money you leave them, you might want to explore a discretionary trust, which gives an independent trustee full authority to make decisions on how the trust funds may be spent for the benefit of the beneficiary.
One final word: Trusts are complex instruments, so you will need to work with an attorney and CPA to make sure your strategy can help you work towards the goals you want.

This article was submitted by local financial representatives of Edward Jones.