Retirement Primer: Things to Know About Trust Funds

While most people think about wills when they think about estate planning, a will is only one part of establishing a plan for your estate. Here are five things to know about trust funds.

A will is a contract between you and your heirs that is enforced by the state. It does the job, but it’s far from perfect. First, the will has to go through a process called probate, which is a hearing in front of a probate judge. Second, there are expensive attorneys to hire, and administrative costs can easily eat 2-4% of your assets before your intended heirs even see a penny. Wills can also be challenged in court and thrown out on “testamentary capacity.” 

Another way to plan for your estate is by establishing a trust. This alternative to a will can be a great choice for people who want more access and flexibility with their estate planning. 

1. A trust fund is a private contract that is always accessible to the holder

The process of probate turns wills into public documents. They’re a matter of record that anyone can look into. In some states, certain parties are even entitled to copies of a will.

A trust, on the other hand, is a private document that never sees a courtroom. No one, other than the trustee and the designees, can see a copy of the trust contract. This can help to prevent quibbling over who got what down the line.

Trust funds also offer accessibility. The assets placed in a trust can be accessed according to the terms set by the grantor, whether that’s immediately, at a certain age, or under specific conditions. This flexibility ensures that beneficiaries receive support when they need it, without the delays often associated with probate.

2. Your designated trustee is responsible for executing your wishes upon your passing

When you establish a trust, you appoint a trustee to manage and distribute the assets according to your wishes. This person or institution is legally obligated to follow the instructions outlined in the trust agreement. Upon your passing, the trustee steps in to ensure that your assets are distributed to your beneficiaries as you intended.

This can provide peace of mind, knowing that your loved ones will be taken care of in the way you envisioned. Unlike an executor of a will, who may need to navigate the probate process, a trustee can often begin administering the trust immediately, ensuring a smoother and faster transition of assets.

3. Trust funds can lower taxes

Life insurance benefits are usually included in your estate. This payment can push an estate over the threshold for federal income tax. 

Irrevocable trust funds, on the other hand, can help reduce or eliminate estate taxes owed after the trust fund holder dies. 

Trust accounts can also spread the capital gains from an estate among several parties, thus lowering the amount of total taxes paid on the proceeds of the sale of a house or other significant assets. 

4. Trust funds allow for greater control

A trust fund offers greater flexibility and control compared to a will. While a will simply dictates who receives your assets after you pass away, a trust allows you to set specific terms and conditions for how and when those assets are distributed. For example, you can create a trust that provides for your children’s education, with funds distributed directly to educational institutions, or you can set up a trust that gives beneficiaries a monthly stipend, rather than a lump sum. You can also stipulate that a beneficiary receives their funds upon reaching a specific milestone, such as graduating from college. This allows you to continue being a part of your family for years into the future.

5. Trust funds do not require an attorney or witness 

While it’s always advisable to consult with a legal professional when setting up a trust fund, it’s not a legal requirement to have an attorney or witnesses present. Trusts can be established by simply creating a trust agreement, which outlines the terms and conditions of the trust, and transferring assets into the trust.

This process can be more straightforward and cost-effective than creating a will, which typically requires formal execution, including signatures from witnesses and, in some cases, notarization. 

A trust fund can be the perfect way to ensure your assets are distributed the way you’d like them to be after you pass on. Use this guide to determine if a trust fund can be the right choice for you.