Trusts can be set up and run while you are alive, or you can prepare a trust as you would a will, to take effect upon your death. A living trust is set up for use in your lifetime, and a testamentary trust comes into existence after your death, when your will is probated.
Trusts used to be just for the very wealthy, or at least that's what most of us thought! But in the last decade or so, the use of trusts has grown significantly in popularity as more and more folks of less-than-millionaire means take advantage of their benefits.
However, the workings of a trust are still not that well known to the average person. How a trust can help in estate planning also is a mystery to many.
What a Trust Offers That a Will Does Not
A Trust has several advantages over a Will. It ...
· Manages property for you while you are alive and can continue when you pass away.
· Can reduce your taxes, depending on how it is written and the laws of where you are from and/or where your assets are held. This could be as high as 45% of you estate value for certain parts of the world.
· Easily transfers your assets to beneficiaries after your death. There are no legal requirements as you have already put instructions in place.
· Could allow you more flexibility in how you dispose of your assets—for example, passing your money on to your children from a prior marriage while omitting your present spouse.
· Avoids probate and its time and expense. If you have ALL of your assets distributed by Will alone, it could take years for your loved ones to receive any funding. They have instant access to the Trust funds.
· Asset protection is a high priority for many people so anything in a Trust is not legally yours any more, therefore only named beneficiaries can receive assets from the Trust. This would remove all 3rd parties as a threat to your assets.
· Protects your privacy; it is not filed and open to public scrutiny the way a will is. If you don’t want the world to know how much you are worth, what your assets are and who you left benefits to, you need a Trust.
Who Should Have a Trust?
People establish trusts for a number of reasons, but these are the main ones;
· Minor children—Parents might use a trust to financially protect minors after the parent's death, or for the special-needs child of any age throughout his or her life.
· Spendthrift children—A trust can be set up for a child of any age thought to be unable to manage money prudently.
· Retirement management—If you want a trust to manage your funds during your retirement, it can do that for you. A trust can take care of you and your spouse when you can no longer look after your own affairs.
· Tax planning—A trust can help you in a number of ways here, not the least of which is legitimate tax avoidance—always a welcome benefit of any estate plan. As a Bri, per se with an estate is more than GBP325,000 as a single person or GBP650,000 as a married couple, certain Trusts would mitigate Inheritance Tax in UK. For Americans, if your estate is more than $5,450,000 in 2016, adjusted yearly for inflation, you can certainly make use of a trust for tax savings.
· Charity—You may be philanthropically inclined and want to establish a trust, perhaps for worthy college students attending your alma mater. Or you might have a pet charity you'd like to contribute to in an ongoing way. Or you could participate in a trust already established by your favorite charity. The choice is yours.
· Legacy planning – sometimes the amount that you will leave behind for your loved ones is too large for them to handle alone. Setting up a Trust can remove un-needed pressure for your loved ones as you have written down how they receive funds.
Suppose that you want to set up a Trust. What are the steps and what is involved:-
· Settlor or Grantor or Trustor The person or people setting up the Trust.
· Objective of the trust You use different types of trusts to achieve a variety of specific estate-planning objectives. You can use some trusts for a single estate-planning objective, while others help you achieve more than one goal. Succession planning, asset protection, tax mitigation or removal.
· Specific kind of trust Trusts come in many different varieties. Regardless, when you’re setting up a trust, you need to decide what type of trust you want and make sure that you follow all the rules for that particular type of trust to make sure that it’s proper and legal, and carries out your intentions.
· Property After you place property into a trust, that property is formally known astrust property. This does not mean houses but our assets. This could be houses/land, cash, shares, annuities, stocks, insurances.
· Beneficiary Just like with other aspects of your estate plan (your Will, for example), a trust’s beneficiary (or, if more than one, beneficiaries) benefits from the trust in some way, usually because the person or institution will eventually receive some or all of the property that was placed into trust.
· Trustee The person in charge of the trust is known as the trustee. The trustee needs to understand the rules for the type of trust he or she is managing to make sure everything in the trust stays in working order. They could be private or professional.
· Rules (instructions) Finally, some of the rules that must be followed are inherently part of the type of trust used, while other rules depend on what is specified in the trust agreement. You, as the Settlor are in complete charge of what rules you want to impose for your beneficiaries.
Who Does Not Need a Trust?
Is a trust right for you? That depends on the type of assets you own, the size of your estate, and your plans for it. If you have few assets right now—say you're young and single, or newly married and just starting out—you can skip a trust for a while. If none of the earlier-mentioned family or lifestyle situations quite fits your needs at the moment, you do not need a trust.
Common Reporting Standard (CRS)
With globalisation and the ever-growing pressure to keep assets transparent, it is important to also understand the power of a Trust for reporting mechanisms. An agreement to share information on (tax) residents' assets and incomes automatically in conformation with the standard (of exchange of information) will be imposed by 47 countries in 2017 and a further 54 countries in 2018. They will know what assets we hold in each country and have to report on it. Anything held in Trust is only one report which will save time, confusion and no doubt costs of reporting.
If you decide not to draft a Trust, you still might have some work to do. Make sure you’ve taken as many steps as possible to avoid probate in your state like making sure beneficiary designations are up to date and adding as many designations as you can.
You should still have a Will though as certain assets such as your bank account or property would still need instructions for distribution.
Regardless of what estate planning strategy you choose, you’ll need to revisit your plan as your needs and the laws change over time.
Finally, as easy as it is to put off thinking about things like death and incapacitation, resist the urge to procrastinate. After all, you never know when you’ll need your estate plan and by then, it will be too late for your loved ones.
Please feel free to contact me for a no obligation discussion on how a Family Trust can benefit your estate.
+852 2542 2285