When you think of trusts, do you picture a bunch of rich people around a mahogany table sipping sherry and plotting world domination? Well, that may be true for some of the most notorious trust beneficiaries but trusts are useful legal tools for everyday people. A trust is a legal arrangement where a person (the grantor) gives property to someone (the trustee) to manage and pay money earned from that property to someone else (the beneficiary). Now why would someone want to do that?
The most common and useful trust is a Minor Trust. In a Minor Trust, the grantor is typically a parent of a child under the age of 18. If one parent passes away, typically their property would go to the other parent. But if both parents pass away, their property (retirement accounts, life insurance proceeds, house, other assets) can go into the Minor Trust. The trustee manages the property and pays the income to the guardians who are actually taking care of the children to pay educational, medical and other living expenses for the children. This can be paid directly to the children after they reach 18 for their health, education or other expenses. The grantor decides at what age (18 or older) the trustee will give children whatever is left in the trust. This can be spread out (10% at 18, 25% at 25, 65% at 30 for example). The grantor has a lot of flexibility in designing the distribution such as having the trustee pay the child a monthly allowance so long as they are enrolled in college or graduate school. If the parents do not plan ahead and set up a Minor Trust, the guardians can pay the expenses of the children but will have to annually account to the probate court how the money has been spent. Then when the child reaches 18 they will receive the remaining money as a lump sum, no strings attached. As you can imagine, 18 year olds and large sums of money are often not a good combination.
Trusts are a good way to safeguard property, such as a lake cabin, that you want to stay in the family. What do you mean “safeguard”? Suppose you have five kids and a cabin now worth $100,000.00 that has been in the family for years. You could put in your will that each of your children gets a 1/5 interest in the cabin. Great – everybody is happy. That is until one of the kids has to file bankruptcy. Then the bankruptcy court sees a $20,000.00 asset to seize. Either the other 4 kids have to come up with the money to pay the bankruptcy court $20,000.00 or the property is sold with the bankruptcy court and the other 4 kids dividing the money. If the cabin is owned by a trust, the kid who files bankruptcy does not own part of the cabin, he only has the right to visit the cabin. The bankruptcy court gets nothing and your family continues to enjoy this family treasure. The trust can also include money to pay for the upkeep of the cabin, pay one of the kids for taking responsibility for the upkeep, set the rules for selling the cabin if the kids no longer want to keep it and how that money will be divided. Good planning now prevents problems later.
Medicare Trusts allow you to have the government (Medicare, medical assistance or similar programs) pay for your nursing home expenses and still keep property, such as your home, in your family. Good planning early is required though. Various time periods need to pass between when you transfer the property and when you apply for the medical benefits for this to work.
Gun Trusts protect individuals from criminal liability for technical violations of laws relating to certain weapons. Rightly so, there are very strict rules regarding the ownership and transfer of certain weapons. Both the grantor and the beneficiary of a gun trust must be legally entitled to own the regulated weapon but since the gun trust actually owns the firearm, it is legally responsible for it. Obviously, this is a very technical matter so don’t try to do this yourself.
Pet Trusts allow you to care for your friends of another species when you are no longer here to do so. Of course you can ask a friend to take in your pet after you die. A good friend will do the best they can to honor your request. The cost of food is not that big of a deal (although it can get expensive) but what about vet bills? Just like people, as pets get older their medical needs increase. A pet trust gives your friend the money to pay for these expenses without imposing on your friendship by asking them to pay expenses they are unwilling or unable to pay.
These are just a few examples of what trusts can do for you. In a future blogpost, I will come up with some more. For more information, contact me directly by calling or emailing. Powerful tools can be very helpful but if they are not used properly they can hurt you or the ones you love. Don’t try this at home – call a pro – like me!