While the words “trust fund” might conjure up a misbehaving celebrity, using trusts wisely can be a wealth-building tool for people at all income levels. Especially those with kids. Here’s what you should know about them.
What’s a Trust?
A trust is a legal entity that one person, called a grantor or settlor, creates to hold property, stocks, cash, etc. for someone else, an individual or organization called the beneficiary.
Trustees are the people (or sometimes corporations) put in charge of overseeing the trust. Often the trustee is a financial professional, friend or family member. Increasingly, they receive annual compensation for administering the trust.
Not Just for Rich People
A trust provides peace of mind for many grantors, who know that their estates will be managed how they want and relatives won’t be squabbling over the fine china. While the grantor is living, trusts can provide substantial estate, gift, and income tax breaks. They’re not just for rich people, either. People of all income levels might set one up to provide for the management of their finances in case they become disabled or otherwise unable to handle them, or to provide for young/disabled/shopaholic loved ones who can’t manage their money. Trusts also help everyone involved skip probate court when sorting out even modest estates after death.
For Life and Death
There are two types of trusts: after-death and living. An after-death trust usually comes into existence through a will. An example would be a parent stipulating in her will that her valuable art collection should go into a trust, administered by a trustee, until her underage daughter reaches 18, 21, or another specified age and can take control of the assets. A living trust can be as simple as a still-living mother establishing a trust for her daughter, and naming herself the trustee and herself and her child as the beneficiaries. The mother still owns the property or holds the assets, but the daughter can get some of the income they produce and will receive it all upon her mother’s death.
Which Trust Is For Me?
There are several kinds of trusts. Pensions, for example, are basically trusts set up between a settlor employer and an employee beneficiary. Some of the more common include:
1. A spendthrift trust, which doles out cash at specified intervals to the grantor’s child or other beneficiary. That way, the recipient can’t squander the money all at once.
Good candidates: Every child of a B-list celebrity, everyone on Jersey Shore.
2. A charitable trust, which allows the grantor to make donations and get tax savings at the same time. Put a piece of art in this trust and it will stay in your property until it is transferred to the charity of your choice upon your death.
Good candidates: Donald Trump, everyone with a Honus Wagner rookie card.
3. A Section 2503 trust, which allows assets to be used on behalf of the minor beneficiary, at the trustee’s discretion, until she’s of age to collect it all.
Good candidates: Knox, Vivienne, Shiloh, Zahara, Pax, and Maddox Jolie-Pitt.
Ready to start a trust? Find a local attorney who specializes in estate planning and—forgive us—trust her to explain more.
Tell us in the comments: Would you consider starting a trust for your own children, or does it still feel out of reach?