How Does a Trust Fund Work?
To maximize the benefits of a trust fund, you’ll need to understand how trusts funds work and how to create a trust fund the right way, advises this recent article from Yahoo! Money titled “How to Start a Trust Fund the Easy Way.” You don’t have to be a millionaire to start a trust fund, by the way. “Regular” people benefit just as much as millionaires from using trusts to protect assets and minimize taxes.
A trust fund is an independent legal entity created to own assets and ensure money and property are used to benefit loved ones. They are commonly used to transfer assets to family members.
Trust funds are created by grantors (known in Louisiana as “settlors“), the person who sets up the trust and transfers money or assets into it. An experienced estate planning attorney will be essential, since creating a trust is not like going to the bank and opening an account. You need the assistance of a professional who can create a trust to reflect your wishes and comply with Louisiana’s laws.
When assets are moved into a trust, the trust becomes the legal owner of the property. Part of creating the trust is naming a trustee, who manages the trust and is legally bound to follow the wishes of the trust following the grantor’s wishes. The settlor and the trustee can be the same person. In other words, you can maintain control over the trust. A successor trustee should always be named, in case the primary trustee becomes unwilling to serve or dies.
Subject to compliance with specific requirements, assets owned by an irrevocable trust are not countable towards Medicaid, if someone in the family needs long-term care and is concerned about qualifying. Any transfer should be done at least five years in advance of applying for Medicaid, but even if it is done months in advance, the plan can pay for itself (and then much more). An elder law attorney can help in preparation for this application and to ensure eligibility. This is a very complex area of law. Do not attempt it alone without the assistance of an elder law attorney.
Trusts can have a long or short life. Some trusts are held for a child until the child reaches age 25, while others are structured to distribute a portion of the assets throughout the beneficiary’s lifetime or when the beneficiary reaches certain milestones, such as finishing college, starting a family, etc.
A revocable trust allows the grantor to have the most control over the assets in the trust, but at a cost. The revocable trust may be changed at any time, and property can be moved in and out of it. However, the assets are available to creditors and are countable towards long-term care because they are in the control of the grantor.
The irrevocable trust requires the settlor to make a gift, but you can still maintain control. It is the best kept secret with respect to estate planning and elder law care for middle class persons.
There are as many types of trusts as there are situations for trusts. Charitable Remainder Trusts reduce estate taxes and allow beneficiaries to receive an income stream for a designated period of time, at the end of which the remainder of the trust’s assets go to the charity. Special Needs Trusts are created for disabled persons who are receiving means-tested government benefits. There are strict rules about SNTs, so speak with an experienced estate planning attorney to ensure that your loved one continues to be eligible, if you want them to receive assets from you. For the wealthy, there are “bypass” and “marital” trusts intended to avoid estate and gift taxes.
Trusts are often used so assets will pass through the trust and not through the probate process. Assets owned by a trust pass directly to beneficiaries and information about the assets does not become part of the public record, which is part of what occurs during the probate process.
To boot, a living trust can help you avoid probate. But in my opinion, probate avoidance generally should not the main purpose of an estate plan. Just consider a trust’s probate avoidance features as “lagniappe”.
Your estate planning attorney will help ensure your trusts are appropriate for your situation, achieve your specific wishes and are in compliance with your state’s laws. A boilerplate template could present more problems than it solves. For trusts, the experienced professional is the best option.
BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.
If you liked this article, “How Does a Trust Fund Work?” read also these additional articles: Does Quality of Neighborhood have an Impact on Developing Dementia? and How Do I Avoid Probate? and Have You Seen this Facebook Post? and What Shouldn’t Be Put in a Will?
Reference: Yahoo! Money (March 18, 2022) “How to Start a Trust Fund the Easy Way”