Estate Planning - Trust Basics
Setting up a trust is an an important part of Estate Planning. Over your life you've probably acquired a certain amount of wealth in real estate, business ownership, stocks, bonds, etc. Setting up a trust to distribute your wealth to heirs can server multiple purposes. The main purpose is to minimize the amount of taxes paid when transferring wealth to your heirs. The creation of a trust involves transferring your assets to a special legal entity that is required to abide by a set of rules about how it distributes investment income and principal over time. This avoids the large lump sum tax you would normally pay if your heirs inherited your assets directly upon your death. i.e. the total value of the assets are not taxed. With a trust you can specify that investment income be distributed to heirs over time.
Use a trust to protect your heirs from themselves!
You might be worried that your heirs are too young, naive, irresponsible or spendthrift. You would like to distribute your wealth to them slowly while they learn how to handle the responsibility of managing money. You can setup a trust with any combination of rules and provisions. For example you can stipulate that investment income is distributed to your children monthly until they reach age 40 at which point they receive their share of the principal. i.e. the idea being they will be mature enough to handle it properly at that age. You can also authorize trust distribution only if they will be used for college education, a home purchase, wedding, etc. To summarize as trust serves two main purposes. The first is to minimize estate taxes and the second is to dictate exactly how assets will be distributed after your death.