One of the most common misconceptions about trusts is that they’re one-size-fits-all.
Chances are, when you think of a trust fund, the financial elite immediately comes to mind. The truth is, people from all walks of life can benefit from a trust but, to do so, it helps to first understand exactly what a trust is and how it works.
In its simplest form, a trust is a legal entity that transfers the title of an asset to a trust for the purpose of benefiting one or more beneficiaries. The trust is then managed by the grantor(s) and is overseen by one or more trustees. The trustees can be the grantors themselves or a financial institution that also manages the trust assets.
1. All trusts are not alike.
One of the most common misconceptions about trusts is that they’re one-size-fits-all, when there are actually different options to suit individual needs. For instance, there are revocable and irrevocable trusts. As the name suggests, revocable trusts can be changed or revoked at any time. This means that the trust assets are still considered to be included in the grantor’s taxable estate and are subject to tax.
On the other hand, irrevocable trusts cannot be changed once they’re executed. The assets placed into a properly drafted irrevocable trust are permanently removed from a grantor’s estate and transferred to the trust.
2. Trusts are flexible.
Just like revocable and irrevocable trusts, there are different categories of trusts designed to meet various objectives. For example, if your primary goal is to ensure privacy in the settlement of your estate, to centralize control of assets or to fully take advantage of estate tax credits provided by the IRS, you might choose a living trust.
If you’d like to leave money to your grandchildren, you can do it through a generation-skipping trust. And if you’d like to benefit your favorite charity while serving your own trust purposes, consider a charitable lead trust. To better understand the extensive options available, consider consulting an estate planning attorney or financial advisor.
3. Trust funds provide greater control and privacy.
While increasing numbers of people are discovering the potential asset protection benefits of trusts, many are unaware of the amount of control and privacy trusts offer.
Because trusts provide control over what happens to your assets after you die, they eliminate probate and are ideal for blended families and domestic partnerships. They can also be very effective in transferring assets to charities, the transfer of real estate to heirs and even ensuring the ongoing well-being of your pets, all while maintaining complete privacy.
4. Trusts can provide tax benefits.
Some types of trusts can help defer or avoid estate or income taxes. For example, the assets placed into an irrevocable trust are permanently removed from a grantor’s estate. Income and capital gains taxes on assets in an irrevocable trust are paid by the trust to the extent they aren’t passed on to beneficiaries. Upon the grantor’s death, the assets in the trust may not be considered part of the estate and therefore may not be subject to estate taxes.
Most people use trusts to help maintain control of assets while they’re alive and competent, or to indirectly maintain control of the dispersion of assets if they’re physically or mentally unable to do so or in the event of death. Although not quite as popular as wills, trusts are becoming more widely used among Americans—wealthy or not.
Paul Granucci is a financial solutions advisor for Merrill Edge, based in San Francisco. Merrill Edge is available through Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S) and consists of the Merrill Edge Advisory Center (investment guidance) and self-directed online investing. Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
