USING TRUSTS TO MANAGE THE DISTRIBUTION OF YOUR ESTATE
- Posted by Michael Kane, CFP®
- On May 26, 2017
- estate plan, Trust
When tailored to the unique needs of your family, trusts are one of the best ways to protect and execute the plans you’ve made on behalf of your beneficiaries.
They help you control the frequency and timing of any inheritance and assist in providing a lifetime of financial security for your loved ones.
Many people believe that you only need a trust if you have a lot of assets or a complex financial situation. However, the truth is that many families across the income spectrum benefit from the use of a trust. Trusts can generally help your estate avoid probate and more efficiently distribute your assets to heirs.
Think of a trust in the same way you would consider investment options such as cash, stocks, bonds, and insurance – you choose certain vehicles based on the goals and objectives of your estate. There are a variety of different trusts that serve specific purposes, and there are rules regarding each.
Here are a few different types of trusts that may serve as useful components in your estate plan by allowing you to control the distribution of your estate.
W-2 MATCHING TRUST
Trusts can help protect assets for the long-term financial future of your beneficiaries. A W-2 matching provision in a trust can be an incentive your heirs to continue gainful employment instead of squandering their inheritance. It provides a long-term income stream and requires actual proof of employment for matching payouts.
PERIODIC PAYOUT TRUST
One of the biggest issues faced by someone leaving an estate is ensuring that the funds are used for the benefit of their heirs. The goal is to provide a lifetime of financial security. Unfortunately, not all beneficiaries are responsible with money. If you’re concerned about the ability of your beneficiaries to be fiscally responsible, a periodic payout trust may be a good option for your family.
Most periodic payout trusts establish ages at which your heirs will receive payouts from the trust, typically 25, 30, and 35. However, financial experts currently warn that 25 may be too young to effectively manage a sizable sum of money. The goal is to provide many years, perhaps even a lifetime of financial security. Spreading the trust payments over several years can help mitigate the chance of it all being spent irresponsibly or in the wrong place.
Another type of trust that can be used if you’re concerned about your beneficiary’s ability to manage money wisely is a Spendthrift Trust. A Spendthrift Trust is a type of trust where the grantor names an independent trustee or trustees to oversee the distribution of trust assets to the beneficiary according to the terms included in the trust, such as monthly distributions of a set percentage or dollar amount.
This type of trust can also protect assets from lawsuits or liability concerning the beneficiary since a Spendthrift Trust is typically not considered the property of the beneficiary but of the trustee.
SPECIAL NEEDS TRUSTS
A special needs trust can be established to protect the financial future of individuals with disabilities in your family. This type of trust is especially important because it will allow you to contribute financially to your beneficiary’s well-being without jeopardizing his or her SSI (Social Security Income) or Medicaid eligibility.
There are many rules governing the appropriation of funds in a special needs trust. For example, the trust cannot pay money directly to the beneficiary but can use the property or funds for that person’s benefit for things like additional caregivers, expenses not covered by state or federal benefits, or other goods and services. States vary in their tax treatment of these trusts, so it’s important to consult your professional advisors to understand the implications for your estate.
Typically created for young children or individuals with disabilities, a testamentary trust is codified in the grantor’s will and takes effect upon their death. Once the estate has cleared probate, the testamentary trust will take effect. This type of trust is helpful if there is a large life insurance payment involved, or if the proceeds from life insurance are larger than other assets included in the estate.
Trusts are important tools that help you distribute the assets of your estate in a way that provides the maximum benefit for your heirs. They also help you control the distribution of your assets in light of special circumstances.
To learn more about these and other types of trusts, request a call with a certified advisor at RAA.
Disclaimer: This blog is intended for informational purposes only and should not be construed as individual investment advice. Actual recommendations are provided by RAA following consultation and are custom-tailored to each investor’s unique needs and circumstances. The information contained herein is from sources believed to be accurate and reliable. However, RAA accepts no legal responsibility for any errors or omissions. Investments in stocks, bonds, and mutual funds may increase or decrease in value. Past performance is no guarantee of future results. Any of the charts and graphs included in this blog are not recommendations for the purchase and sale of any security.