You’ve surely heard of trust funds before. Most people assume that these are simply tools of the extremely wealthy to pass on massive amounts of money to the next generation. The reality, however, is that almost anyone with savings–including many middle class families– can benefit from trusts. So, how do trusts work?
A trust is a legal instrument that manages assets bequeathed by a trustor on behalf of beneficiaries. You essentially turn over the titles of your assets to the trust, which will then be managed by the trustees. During your lifetime, you can name yourself as both the trustee and the beneficiary, which means that you both manage your property and can use the proceeds as you could if you owned the property directly. Very little will change for you on a practical level until after your death.
When the beneficiary of a trust dies, the trust continues to exist. A new beneficiary and alternate trustee gain control of the trust without any waiting period or probate process. Your loved ones immediately gain control over your possessions. You can even structure a trust to only disburse proceeds for certain purposes, like education or purchasing a home, or at a certain monthly rate to ensure that you can provide for them over a longer period of time.
Why Is a Trust Often Better Than a Will?
Just understanding how trusts work isn’t enough for many people, of course. They also want to know how a trust benefits them. In fact, many people wonder, “Why is a trust often better than a will?” This answer isn’t simple. In fact, most people will use both a will and a trust to carry out their wishes after passing away. There are some distinct benefits in having a trust, though.
When you leave property to your loved ones in a will, it must pass through probate court before it passes on to your beneficiaries. This can take a long time, during which your family is left to manage your estate and pay any debts. And probate can sometimes leave your will open to unexpected claims against the estate. It’s possible that some assets will even end up being left to a person you never intended to have any property.
Certain types of trusts can also be used to reduce the value of your estate, assuming you have a estate large enough to worry about estate taxes. This is a complicated subject, but there are ways to transfer some of your assets to an irrevocable trust so that you no longer own those assets for purposes of the estate tax.