What is a trust fund an important financial planning tool?

Understanding Trust Funds

A trust fund is a fiduciary agreement in which a third party or trustee, is given control over a person’s assets in order to facilitate distribution to beneficiary or beneficiaries. A trust serves in many ways the same role as a will but unlike a will it goes into effect when it is created rather than upon the death of an individual. There are a variety of trusts and they are typically differentiated by the way that they distribute assets to beneficiaries.

The two basic forms of trust are irrevocable and revocable. Irrevocable trusts are forms of trust in which the individual is signing away assets to a third party to be distributed. It is important to understand that the irrevocable trust takes the assets away from the individual (Silverman, 2011). The benefit is that there is no taxation on the assets as there would be from estate tax. The revocable trust is a trust in which the individual retains control of the assets and is free to change the terms of the trust at any time (Silverman, 2011). The revocable trust does not provide a tax shelter however.

There are many different forms of trust that such as credit shelter trusts or generation-skipping trusts. The trusts are generally chosen on the needs of the creator and what this person believes needs to be done with assets. There are also two methods of planning a trust: living and testamentary (Silverman, 2011). The living trust is setup while the individual is alive and the testamentary trust goes into effect upon the death of the individual (Silverman, 2011).

A trust is an important planning tool due to the fact that trusts typically avoid probate. There are a number of benefits to avoiding the probate process such as faster access to assets from beneficiaries and there are large tax benefits depending on which type of trust is created (Silverman, 2011). For instance in an irrevocable trust the assets are not considered part of an estate at death because the individual does not own the assets from the time the trust goes into effect.

There is also a greater degree of control over wealth. Individuals using a trust can specify specifically the terms of the trust such when the assets are to be distributed as well the amounts. For instance, many trusts are created to ensure that family members who are not proficient with investment are ensured income but cannot have access to the full amount of an estate. Other control measures that trusts provide is providing partial benefits and designating that upon death the full benefits be delivered to the beneficiary.

There is also the benefit of privacy. Unlike wills which are public record, trusts are private since they do not pass through the probate process. For people, who value privacy of their heirs the trust will keep financial gains undisclosed (Silverman, 2011).

Depending upon the value of the individual’s assets and number of heirs, would determine whether a trust should be created. There are many considerations that need to taken into account for the creation of a trust. According to Silverman (2011) questions to determine a trust include:

For individuals, with large assets the trust is ideal since it is tax deferred in most instances and because there is nothing to contest. The terms of the trust are clear and very hard to alter. The trust can also provide a significant level of protection to future generations depending on the level of money that is being handled. One of the greatest benefits of the trust is that it is able to carry on one’s legacy and protect it from being pilfered by family members or unscrupulous individuals. For individuals concerned with leaving their future heirs security and wealth the trust would be the best recommendation.

References

Silverman, R. E. (2011). The wall street journal complete estate-planning guidebook . New York: Crown Business.

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