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4 financial situations to consider creating a trust

A trust is something that people often assume is not for them, but in reality, it can be a valuable, useful financial planning tool.

What is a trust?

A trust is a legal arrangement that can provide a way to manage and protect money or other financial assets for specific financial and personal goals. Trusts can be very flexible and can be created during a person’s lifetime or at their death through a will. They can be created to  take be effective during life or after death. And, they can benefit the creator (or settlor) of the trust or can be used to benefit others, including family members, friends or even charitable organizations.

Trusts are useful in a variety of ways, depending on your financial goals, your family's needs, and your overall circumstances in life. Among other benefits, they can help you plan for the future, pass assets on to loved ones, provide for special needs children.

There are several types of trusts, such revocable trusts, testamentary trusts, charitable remainder trusts and more. You will typically want to work with an attorney to help create your trust and explain all the benefits and advantages while helping avoid any pitfalls.  The trust document that is drafted by the attorney will outline all the provisions of the trust – who it benefits, when it takes effect, how long it lasts and how terms may (or may not) be changed in the future. Most importantly, the document will appoint the “trustee," or person designated to manage the assets. This is a critical selection as the trustee has the fiduciary responsibility to operate the trust under the terms of the document and under relevant laws. The trustee can be a bank or other financial institution, an attorney, a trusted loved one, or even the creator of the trust.

Here are four situations where you might want to create a trust. 

1. Protecting assets for children

What if you want to give some money to your nieces and nephews, but they are not yet of legal age to manage the money or not mature enough to manage money on their own? What if you die before your children turn 18, and you want to provide money to take care of them, but in a responsibly managed way?

Perhaps you have children that are not yet of legal age. Or, you may have children that are of legal age that have not demonstrated an ability to manage their financial affairs.

Setting up a trust also gives you the ability to decide how money and other assets are distributed. It also lets you have control over how money is managed and when your loved ones are allowed to fully take control of those assets.

For example, if you want to leave money to a child, you can set up a trust that provides specific instructions for how those assets are used after your death. You can specify in the trust document that the money has to be used for higher education or that the child has to wait until they are 25 years old to inherit the money. You can also dictate in the trust that if the child marries and then eventually divorces, that money in the trust that they inherited cannot be split with their ex-spouse. Trusts can be flexible, depending on your goals.

2. Providing for a child with special needs

If you have a child with special needs who will require dependent adult care and services, you might want to create a trust to help save, invest, and provide advance planning for how that child should be cared for and their financial needs managed. Trusts can be set up to provide for a dependent adult child in the event of your death. Money can be managed and disbursed responsibly, in a way that suits the adult child's needs.

If your adult child receives public benefits like Supplemental Security Income (SSI) and Medicaid, you can set up the trust in a way that pays income to your child but avoids providing “too much" income to the point where you exceed the eligibility limits for those public benefits.

3. Planning for Life Insurance proceeds

If you have a life insurance policy, that death benefit amount may be part of the estate that you pass on to your heirs. It can be a significant amount of money. Creating a trust that is the beneficiary of those proceeds can make your wishes clear and enforceable by courts; you can leave money to your loved ones in a way that is responsibly managed and protected. It’s also possible to own the Life Insurance policy within a trust, creating even more benefits for both the settlor and the estate.

4. Building a comprehensive estate plan

Trusts can have some good benefits for estate planning, even if you don't have substantial assets to pass on. Instead of just writing a will, creating a trust can give you an added level of privacy. In some states, using a trust for estate planning can keep the terms of your will from becoming public. Setting up a trust as part of your estate plan can help make it easier and faster for your loved ones to inherit assets after your death without having to go through the probate process.

There is no one-size-fits-all solution for how to set up a trust or to take advantage of a trust’s potential benefits. Talking with an expert is a good way to get specific advice on your situation and find the right type of trust for your needs.

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