Estate planning is a conundrum all parents struggle with to ensure their children and loved ones are financially secure. Those with grandchildren and large families need to plan their estate diligently to ensure equal distribution of assets. Trust funds are an efficient and reliable tool to plan your estate with the assistance of a neutral third-party executor.
Trust funds are a versatile estate planning instrument that designates a legal authority to hold assets or money for an individual or organization. Trusts funds are viable for various assets, including real estate, money, a company, stocks, bonds, and shares. It can also hold assets, such as money, real properties, and businesses.
Establishing a trust fund involves three parties: the trustee, beneficiary, and grantor. All three parties must comply with the legal stipulations of the trust fund. Why do people and organizations choose trust funds over other estate planning tools? Several benefits make trust funds highly advantageous, such as tax benefits, financial support, and protections.
Keep reading to learn more about the long-term legal benefits of establishing a trust fund.
Trust Funds: How do they work?
It’s crucial to learn how trust funds work to understand their legal benefits and drawbacks.
The underlying goal of estate planning is to ensure your financial affairs and assets are distributed according to your wishes. Most people write wills and appoint executors to run their estates and distribute their wealth amongst their dependents. However, trust funds are a more popular and versatile tool to entrust your legal and financial interests to a reliable trustee.
A trust fund can hold anything, including wealth, residential and commercial properties, artwork, debt, life insurance, etc. The grantor, individuals who set up a trust fund, chooses beneficiaries who will receive their assets and wealth. Grantors appoint a neutral third party, the trustee, to manage and distribute their assets populated in the trust.
Attorneys, trust banks, reliable employees, financial experts, and reputable family members serve as trustees in most cases. The fundamental requirement is to ensure neutrality and prevent the trustee from exploiting the trust fund stipulations and distributing assets unfairly. This arrangement ensures that the grantor’s assets and financial affairs are well-managed after they die or become mentally challenged.
The trustee, serving as the designated fiduciary, is responsible for executing the trust fund’s stipulation following the grantor’s directions. The stipulations include living expenses, private school funds, college tuition, and medical care funds in most cases. The trust fund can also distribute a lump sum amount amongst the beneficiaries after they reach a certain age.
Why Choose Trust Funds?
Why do people choose trust funds over other estate planning instruments? Trust funds provide a vast host of financial protections and tax benefits for the grantors and beneficiaries. First and foremost, creditors cannot access assets within the trust fund should they decide to claim the grantor’s unpaid debts. Secondly, trust funds provide legal security and prevent the hassle of going through lengthy probate proceedings.
Probate is a legal process of asset distribution if an individual dies without leaving detailed legal instructions in their will. Trust funds are also preferred because of the deductions in estate and inheritance taxes typically charged after asset distribution. Beneficiaries are liable to pay inheritance taxes on the property or wealth they inherit. And estate taxes are applied on the total value of the grantor’s estate.
Are Trust Funds only for Multi-Millionaires?
Gossip Girls and other TV shows depicting the lives of the ultra-rich would have us believe that trust funds only serve the elite. That’s not true. A trust fund can benefit anyone, regardless of how much wealth or assets they own. It all boils down to how you want to manage your money and assets to secure your dependents and beneficiaries.
§ Financial Security Blanket for Loved Ones
Suppose you have a child with special needs or your spouse has a mental disability. In that case, establishing a special needs trust fund will ensure they get quality care and financial support after your death. A special needs trust will cover all expenses that aren’t covered by insurance of public health benefits.
This arrangement allows beneficiaries to access their trust fund benefits without getting disqualified for public benefits programs. They can access benefits like Medicaid, Medicare, and social security payments to supplement their income.
You can establish a special needs trust for your parents, siblings, spouse, children, or other family members.
The Trust Fund will secure your future and if you have remote employees in your business, do not forget to submit a non-employee compensation (NEC) form to the IRS every year. Otherwise, you will have to pay a fine. You can easily download the PDF by generating the online form with the 1099-NEC generator. It will protect you from the tax authorities. Moreover, it will help the employees to solve their banking problems. This means that if you have freelance or remote staff in your organization, be careful about NEC and also encourage them to trust funds.
§ Managing Senior Care & Life Quality
There’s a common misconception that trust funds serve grantors only after their death. The rising population of aging baby boomers has introduced trust funds as an efficient tool for planning senior care. Seniors can consider trust funds as a retirement planning tool to detail their medical needs and life quality stipulations.
In a care management trust, the grantor is also the beneficiary, and a trustee makes decisions when the grantor is mentally incapacitated. The trustee will carry out the wishes detailed by the grantor, ensuring future care and financial independence. For instance, the grantor can join an assisted living facility or reside in their own property with at-home care.
A care management trust will ensure that your family members and caregivers cannot disrespect or second-guess your plans. Only the trustee of your care trust will have the decision-making authority to execute your wishes.
§ A Nest Egg for Minors or Grandchildren
Are you worried about leaving minor children in financial and legal complications after your death? Or perhaps you want to create a sizable nest egg to fund your grandchildren’s college and travel dreams? Either way, a trust fund is the best inheritance management tool for children who cannot make financial and legal decisions.
You can lay down specific instructions, including details on monthly and yearly income management, property management, business operations, and more. A trust fund is a viable solution when distributing assets between several minor children or grandchildren.
It’s wise to sit down with financial and legal experts to analyze how a trust fund will serve your interests.
Trust funds aren’t limited to wealthy investors and executives with millions of dollars to distribute, as we’ve discovered above. Anyone can set up a trust fund to ensure their legal interests and loved ones are looked after as instructed.
Krishna Murthy is the senior publisher at Finance XOD. He is not only the senior publisher but also the owner of Tricky Finance. Krishna Murthy was one of the brilliant students during his college days. He completed his education in MBA (Master of Business Administration), and he is currently managing the all workload for sharing the best banking information over the internet. The main purpose of starting Tricky Finance is to provide all the precious information related to businesses and the banks to his readers.