Is a Trust Right for You?

Allison Kade

When most people think about trust funds, they envision spoiled rich kids and wealthy families trying to dodge taxes on their piles of money.

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But what they might not realize is that trust funds can be an incredibly useful—even vital—tool for middle class families, as well.

A trust isn’t a financial instrument like a 529 plan or a retirement account. Strictly speaking, a trust isn’t a kind of account at all—it’s a legal entity that lets you put assets on hold for another party. A document designates how the contents of the trust will be distributed, to whom (the “beneficiary”), how those contents may be used and who is responsible for that distribution (the “trustee”).

“During your lifetime, a trust is like your shadow or your buddy following you along,” says Lorrie Minor, a Certified Financial Planner™ with LearnVest Planning Services. “You can treat the trust as an entity, like yourself—it can get paid, pay other people, and function as a financial body, but it isn’t an account type. If you want to find the best vehicle for your financial life, and for your heirs, your safest bet is to speak to an estate planning attorney.”

So a trust is your shadow—but do you really need one? Read on to learn more about the ins and outs of trusts, and how to start figuring out whether one is right for you.

How Should You Set Up a Trust?

While there are many kinds of trusts, the most common type allows the person who establishes the trust and contributes its contents (the “grantor”) to be both the beneficiary and trustee during his or her lifetime. This is called a living revocable trust, because it can be changed while he or she is alive. When the grantor dies, the trust becomes irrevocable, or unchangeable.

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When you have money in a nonretirement account like a brokerage account, you have the option of making that account “transfer on death,” or TOD, which means you fill out paperwork at your bank or brokerage that enables your account to transfer to a beneficiary automatically upon your death, bypassing the otherwise-mandatory legal process called probate. If your accounts don’t have transfer-on-death measures established, that money has to go through probate, will or no will, and the information in that process can be released to the public. By putting money in a trust, the trust automatically bypasses probate and the details are kept private.

Despite the recent availability of user-friendly trusts you can set up online, “an adviser will lead you to what’s best for your situation, versus a cookie-cutter trust built for the masses,” says Lou Karol, an estate planning attorney based in Long Island, New York. Minor agrees: “Personally, although I have been practicing financial planning for 20 years, I would definitely consult an attorney for more complex situations,” she says.

Unsure if a trust is right for your family? Here are some reasons you might consider creating (also known as “executing”) a trust: