A trust is a legal document that allows a third party, or trustee, to handle your assets in the event of death or incapacity.

Why do people set up trusts?

People set up trusts to help manage their assets during their lifetime and after death. In the event of death, trusts make sure that your beneficiaries receive your assets according to your wishes. They can assist you in caring for dependents that may struggle with financial inexperience, addiction, or illness. In the event of incapacity, they also ensure that you get the type of care you need.

Who is involved in a trust?

A grantor is a person or institution that has assets and creates a trust.

A trustee is appointed by the grantor to manage the trust for a beneficiary or beneficiaries. The grantor can choose a corporate trustee, relative, or other person to manage the trust. (See How to Choose A Trustee). If the trustee is a financial institution, a trust officer will be assigned to administer the trust account. Trustees should have the expertise, time, and objectivity to properly manage your assets.

A beneficiary is a person or institution that receives distributions of trust assets. Beneficiaries can be children, spouses, other relatives, charities, or any other entity named by the grantor.

Benefits of a Trust:

  1. Control – Trusts allow you to set specific guidelines about the management of your assets. For example, you can set parameters so distributions only take place when your beneficiary:
    • Turns 18
    • Enrolls in college
    • Graduates from a rehabilitation program
    • Uses them to fund expenses related to health, education, maintenance and support (“HEMS”)

    HEMS is a standard often used in trust documents to define when certain distributions are appropriate for the beneficiary. Some examples of HEMS include:

    • Health – Medical expenses, surgeries, hospitalizations, rehabilitation treatments, therapies, gym memberships, health screenings, eye or dental exams, and alternative medical treatments.
    • Education – Tuition for college or technical school, career training, books, study abroad programs, and school supplies.
    • Maintenance and Support – Rent or mortgage payments, insurance, updates to housing, groceries, property taxes, and other types of reasonable support.

    If your beneficiary needs help managing money, you can decide to limit how much money they receive each year. You can also customize distributions for charitable organizations, universities, or any other institution named as beneficiary.

  2. Protection During Incapacity – Incapacity planning, addresses your needs if you lose the ability to make decisions for yourself due to accident or illness. Wills have no power until you pass away, but trusts can help in the event that you cannot make your own decisions. Both are essential for a comprehensive estate plan. If you set up a revocable trust, you serve as your own trustee unless you become incapacitated. Then, your designated successor, or back-up, trustee steps into your shoes and manages your assets, makes distributions, and ensures you receive the care you set in the document terms. To create an incapacity plan for assets outside of the trust, consider naming a power of attorney to act on your behalf.
  3. Tax Benefits – Depending on the status of the grantors (married, single, etc.), the value of the estate, and the terms of the trust, grantors may reduce or eliminate estate taxes.
  4. Avoid Probate – Trust assets are not subject to probate. Probate is the court process of administering a person’s estate after death. Probate typically involves significant time and money – heirs may need to pay attorney fees, taxes, or estate debts while they wait for the settlement.
  5. Privacy – Trusts provide privacy for grantors and beneficiaries. Probates are part of public record, so anyone can find information about estate assets – including their value and who received them. Details of wills become public record, while trusts remain privately administered.

What are the Different Types of Trusts?

  1. Revocable Trusts – A revocable trust, or a living trust, is created during the lifetime of the grantor and can be modified or revoked. If your circumstances or wishes change, it is flexible and can be amended or redrafted at any time. The grantor serves as trustee during his or her lifetime, maintaining control over all assets; however, the grantor must name a successor trustee in the event of incapacity or death. Upon incapacity or death, the revocable trust becomes irrevocable.
  2. Irrevocable Trusts – An irrevocable trust cannot be revoked after creation. Generally, the terms cannot be modified.
  3. Charitable Trusts – A charitable trust is created to provide distributions to one or more qualifying charities under 170(c) of the Internal Revenue Code, including but not limited to:
    • Churches
    • Synagogues
    • Religious organizations
    • Civil defense organizations
    • Fraternal societies

    A Charitable Lead Trust names one or more charities as the primary beneficiary to receive distributions. A Charitable Remainder Trust provides some distributions to other beneficiaries, like children or spouses, while preserving a balance for charity.

  4. Special Needs Trust – A special needs trust is created for a beneficiary to receive financial support, without disqualifying the beneficiary from government benefits, like Supplemental Security Income or Medicaid.
  5. Spendthrift Trust  – A spendthrift trust is created to limit beneficiary access to trust funds, giving the trustee full authority over distributions. Often, beneficiaries are unable to control their spending. The grantor can help the trustee make decisions about distributions by adding the HEMS standard to the document.
  6. QTIP Trust – A QTIP trust is created to provide for the surviving spouse, while also saving remaining assets for future generations; it protects biological children from potential disinheritance.

What Can You Put in a Trust?

Assets can include more than your financial savings; they can include your home, business, or personal property.

  1. Financial Assets
    • Cash
    • Stocks
    • Bonds
    • Checking and savings accounts
    • Non-retirement investment accounts
    • Notes payable to you
  2. Real Estate
    • Homes
    • Land
    • Farms or ranches
    • Agriculture, including crops and livestock
    • Commercial properties
  3. Personal Property
    • Cars
    • Boats
    • Jewelry
    • Antiques
    • Artwork
    • Clothing
    • Books
    • Computers or other electronic devices
  4. Other Assets
    • Patents or copyrights
    • Small business interests (stock in a closely held organization, partnership interests, or limited liability company shares)
    • Oil, gas, and mineral interests

After you decide which valuable assets to include, you can choose who will receive distributions and set parameters for management and administration.

In preparing for the future, trusts can be an essential part of your long-term financial plan. It’s important to meet with a qualified estate planning attorney or trust officer about how to best protect your assets and beneficiaries.

Trust services provided by Members Trust Company, a federal thrift regulated by the Office of the Comptroller of the Currency. Trust and Investment products are not NCUA/NCUSIF/FDIC insured. May lose value including the possible loss of principal. No financial institution guarantee. Not a deposit of any financial institution. This is for informational purposes only and is not intended to provide legal or tax advice regarding your situation. For legal or tax advice, please consult your attorney and/or accountant.