Trust funds can have profound money-saving tax benefits if they are set up correctly. This is usually accomplished with an irrevocable life insurance trust; it is the most common type of trust set up to save tax money. In a typical scenario without a trust, all of the money from your life insurance is given back to your estate if you die, and it becomes taxable income for your estate. This can be a significant financial burden for your heirs, especially if the value of your estate is substantial.
However, with an irrevocable life insurance trust, you can practice intelligent wealth management. This type of trust protects the life insurance benefit from being subjected to estate taxes. A decedent with distributable assets typically has an estate tax burden that heirs must pay before taking possession of any inheritance. With an irrevocable life insurance trust, your beneficiaries still get the money from the policy, but it is not considered a taxable part of your estate.
Making Sure Your Money Is Handled as You Wish, Even When It Belongs to Someone Else
A frequent concern of those with substantial assets is how their children will handle them. If something were to befall you and you were no longer there to oversee your finances on behalf of your children, could you truly be certain they would handle the money and physical assets responsibly?
A common scenario is this: A person with substantive wealth wants to leave a million dollars to each of his or her children. However, this person is concerned that the children will squander the wealth in a frivolous manner, leaving them with no financial security for their futures. The parent wishes to ensure a secure financial future for his or her children, even it it means protecting them from themselves. Therefore, the parent approaches a financial planner to set up a trust fund for each child. Stipulations are attached to each trust that mandate a certain level of education, a particular age, or a demonstration of sufficient personal maturity before the assets in the trusts will be distributed to the beneficiaries to do with as they please.
Common stipulations for trust inheritance for children include graduating from college, being employed full-time, owning a home, being married, being a parent, or having a certain amount of money of their own in savings. The individual who is setting up the trust, of course, is free to determine their own personal preference for inheritance stipulations.
If you are concerned about your children being able to meet their financial needs before they come into full inheritance of their trust, you can arrange for the grantor to pay an annual allowance to each of your heirs and beneficiaries. The money will come directly out of the trust. Depending on whether the trust is earning interest, there may be less money left over for your beneficiaries to inherit after the annual allowances are distributed; however, an interest-bearing trust may still support the full value of the original trust fund when your heirs come into full inheritance. This is something your grantor can discuss with you when you are setting up the trust.
If you elect to provide an annual allowance for your beneficiaries, you may include stipulations in the trust regarding what the allowance may be used to purchase. Your heirs can be made accountable to the grantor to prove they are complying with the terms of the trust in how they spend their allowance. To eliminate any possibility of the allowance being spent inappropriately, you may also choose to give your grantor the power to pay your heirs’ expenses for them out of their annual allowance; this way, no actual cash ever touches the hands of your heirs until they come into full inheritance of the trust.
Providing for Charities
It is not merely your children or other relatives who can be beneficiaries of a trust. You may also elect to provide for charities that are important to you. This is done by establishing a charitable trust. A charitable trust is a separate entity from any other trusts you establish and is used for the sole purpose of supporting one or more charitable causes.
With a charitable trust, you can arrange to manage distributions of money from it yourself while you are living. Once you are gone, your trust grantor will have the power and responsibility to make regularly scheduled distributions to your charity or charities, either annually or on another schedule specified by you. Alternately, you may elect to have the full amount of the trust distributed to your charity or charities after your demise, at which point the trust would be liquidated and dissolved.
A trust fund protects your finances and assets like no other investment vehicle can accomplish. Establishing one is an investment not only in the future of the wealth you’ve worked diligently to build but in the future of the heirs and charities you want to protect and support after you’re gone. A trust fund is made to weather virtually any outside economic storm. It isn’t subjected to the whims of Wall Street. Once your money is in the trust fund, it is safe from market conditions that may put a dent in your other investments. It sits quietly guarded in its own insular world, guarded by your careful work with your grantor in establishing it, until your beneficiaries are ready and qualified to receive it.
The Final Word on Trust Funds
These are all profound reasons to establish a trust fund if you have a significant amount of wealth. It is costly to establish one, as the creation of a proper trust fund is a complex thing. However, if you know and are confident that your wealth will last beyond you, it is well worth it to establish a trust to protect what you have labored to achieve and provide for our beneficiaries as you deem fit.
If this situation describes your own, talking to a financial planner about setting up a trust as soon as possible is recommended. The sooner you create and establish your trust, the sooner your money will be protected for those you love and the causes you believe in. When you have significant wealth, a trust fund is a crucial element of intelligent financial planning.