There’s A Trust For Almost Any Situation

There’s A Trust For Almost Any Situation

When it comes to estate planning, trusts are most commonly used for transferring assets after death to heirs or charities in order to avoid the cost, visibility, and potential delays associated with having only a will. But did you know that trusts can be used to transfer assets to others while you’re still alive? And in ways that can not only shelter taxes but protect the beneficiaries from risks including those that might even be self-inflicted?

In general, there are three parties to a trust: the grantor (you), the beneficiary (the person who ultimately receives the assets that the grantor put into the trust), and the trustee (a third party who holds and manages the assets on behalf of the beneficiary and who administers the distributions). A trust’s flexibility lies in the fact that the grantor not only funds the trust but gets to stipulate how and when the assets are to be distributed to the beneficiary. There are so many ways in which trusts can be written that you can almost always find one that will suit your purpose. Here are a few of the more esoteric examples.

Suppose you have an adult child with disabilities. Eligibility for receiving governmental assistance for medical and other care expenses may be limited based on her net wealth.  A Special Needs Trust can be created to shelter her assets so that she can maintain her qualification for public assistance.

What if you would like to transfer your home to your son before you die but need to be able to continue to live in the house for the next ten years before moving to a senior living center? Simply gifting the house to him could result in a gift tax, plus you’d be at risk of being thrown out since the house would now belong to him. To avoid such issues you can create a Qualified Personal Residence Trust (QPRT). Under a QPRT the grantor (you) maintains the right to live in the house for the duration of the trust even though you have transferred ownership to your son. (If you are still alive after the ten years have passed your son will have the right to kick you out so make sure the trust does not terminate before you are ready to move. Better yet, keep on good terms with him!)

If you have an adult daughter who is a spendthrift, a so-called Spendthrift Trust allows you to support her financially after you’ve passed away while restricting the amounts that the trustee provides her for living or other expenses so that she does not run out of money prematurely.

Perhaps you want to encourage your adult son to get married. You can fund an Incentive Trust that restricts distributions until after marriage. Or perhaps to provide him a posthumous gift after he has graduated from college. But be sure not to specify anything illegal. That’s not only morally wrong, it would invalidate the trust.

Do you own a pet? You can create a Pet Trust to provide for your cat, dog, snake, or practically any animal if you were to pass away or become incapacitated. You could even appoint multiple trustees, one to manage the distribution of funds and the other to provide the care according to your instructions. Of course, trustees have the right to be paid by the trust for their services. The more trustees you have, or the more complex the trust, the higher the expenses which reduces the funds available for the beneficiary.

Trusts have been around for centuries and have been used for countless purposes. If you’re facing a complex situation involving transferring assets to someone in some restricted way, either while you’re alive or after you’re dead, have a chat with your CFP® or estate attorney. There’s likely a solution.

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