If you are about to make your estate plan for the first time, you may have heard people talk about trusts. You might think there is only one type of trust. However, it is not that simple. There are several types of trust and various ways of setting up each one. Each fulfills a particular need.
What is a trust?
A trust is a legal agreement between two parties. The person who creates the trust asks someone else, known as the trustee, to look after assets for the benefit of a third party, known as the beneficiary. The trustee cannot manage the money as they please. Instead, they must manage the trust according to the rules under which it was created.
Why put assets into a trust?
Why not just keep the money in a bank account?
- Trusts protect assets in ways that bank accounts cannot: A trust can remove assets from your estate, thus protecting them from being taxed when you die.
- Trusts can protect assets from other people: Some trusts protect your money from creditors. They allow you to pass the assets to your heirs, even though you may owe money to others. Other trusts help you protect assets from healthcare companies or benefits agencies. If you leave money in the bank, the agencies may deem you or your child have too much wealth to qualify for aid.
- Trusts can protect people from themselves: A trust can limit a beneficiary’s access to money you leave them. The trustee will manage the funds on their behalf, according to your rules. It can help prevent a beneficiary from spending it all in one go.
Choosing the right trust for your needs, and setting it up in an ideal way takes experience. Good legal advice is essential to effective estate planning.