With people generally living longer, grandparents might think time is on their side to decide how to pass their assets on to their descendants. But there’s no time like the present to plan to ensure your wishes are fulfilled as you help secure your family’s financial future.
There’s no shortage of options, including direct gifting, wills, 529 college savings plans, life insurance policies, and payable-on-death accounts in which they directly get, for example, your savings account.
But if you have to choose just one as the single best way for distributing an inheritance, setting up a trust likely provides the most benefits.
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Trust these basics
A trust is a legal entity that holds assets for beneficiaries. The person who creates the trust appoints a trustee — and that can be you and then someone you appoint to take over for you — to manage the assets based on the exact instructions in the trust document.
Trusts give you control over asset distribution, before and after your death, while avoiding the time and expense of probate. They’re also generally considered more difficult to contest than a will.
The basic types of trusts
There are many types of trusts, including the two most used in estate planning: Revocable and irrevocable.
Revocable trusts, also called living trusts, allow you to place assets like real estate, investments, and cash into a trust while alive. You maintain control as the trust creator and can make changes or revoke the trust entirely. Upon your death, a successor trustee manages the assets, including their distribution.
Living trusts provide control, flexibility, and privacy in passing on an inheritance. With the right thought and planning, they ensure your wishes are executed efficiently.
Irrevocable trusts cannot be altered once created. These are often used to minimize estate taxes by removing assets from the estate. A typical kind of irrevocable trust is a discretionary trust, in which the trustee is explicitly given complete say — or full discretion — over when and how the assets are distributed, including based on the beneficiaries’ general welfare. (For instance, not giving a certain grandchild access to the cash until they’re, say, 30 years old.)
Protecting assets from taxes and creditors
Trusts are also tax-efficient. Assets transferred to heirs directly can trigger capital gains taxes and lose exemptions like the step-up in basis — which is what happens when an inherited asset rises in value above its original purchase price. Proper structuring can minimize the tax effect on your descendants and their inheritance. That’s something to ask an expert about unless you’re already a qualified tax attorney or CPA.
Trusts can also protect assets from creditors, and from legal judgments (including divorce and bankruptcy) against the inheritance while those assets are in the trust. That’s because they’re not the beneficiaries’ money or property. Not yet. That’s a biggie for a lot of people when they structure a trust.
That protection, however, varies from place to place and for many reasons. Be sure you understand yours and the exact situation as best you can and, again, convey that to the experts creating the trust. And have an experienced estate planner, attorney, CPA, financial advisor, or all of the above help you create the trust.
Potential drawbacks of using trusts
There are also some potential drawbacks here. It bears repeating: You need to have the trust created by a qualified expert. When done correctly, that’s probably not cheap. There are also the ongoing costs of managing the assets.
Rigid instructions could also prevent beneficiaries from responding to changes in their lives and circumstances. You should keep flexibility in mind. Again, an expert in estate planning can help you incorporate that into your trust.
Trust in this way to pass your prosperity on
The most effective way or ways to pass on your property depends on your unique situation. However, for many grandparents, trusts allow efficient, conflict-free asset distribution. With mindful setup, trusts make your values clear and provide for heirs exactly as you intend.
What they do with that inheritance is ultimately up to them, but at least you’ll know you did your level and legal best.
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This article was written by Marc Rapport from The Motley Fool and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to [email protected].
