Trust Funds for the Not So Wealthy

You’ve probably heard of trust funds.

You know, the accounts that the rich set up for passing wealth to their families, friends or favorite charities. However, most people don’t understand what they do or how they work.

One really cool part of trusts is that they allow a person’s money to continue to be useful after they pass away.

Trusts aren’t just for the ultra-wealthy. Anyone can set up a trust fund, they are for middle class folks as well.

What the heck is a Trust Fund?
Trust funds allow you to pass your lifetime savings to the people you love, charities or causes that you believe in. You can place cash, securities, real estate or valuable belongings in your trust. You can also set certain requirements to your beneficiaries that must be met.

What if you have a “financially challenged” loved one? You know the one, they have five bucks and managed to spend ten. If you are concerned about their financial irresponsibility, a trust is the way to go. Maybe you would like to see children and grandchildren enjoy your money or assets? If you have these situations, then a irrevocable trust is what you need. You can turn on stream of monthly income, stipulate the money be used for education or illness, or even a home purchase. It’s your moo-lah, you decide.

Irrevocable means you cannot change or dissolve it. It’s permanent, and the money you put in the trust is no longer yours. Now it is under the care of a trustee, such as a bank or attorney. So think long and hard about who you choose here.

Now that these assets are no longer yours, you don’t pay tax on the money made any more. In fact, if set up properly, you can also avoid estate taxes. Bypassing estate tax is the main reason most people set up this type of trust in the first place. This trust removes the assets from your estate and possible moving you to a lower tax bracket.

Other Not-So-Weatlhy Options?
If a trust is not your cup of tea, because the attorney fees can be expensive, there are other choices. There are other options that will allow you to control the assets just like the trust.

Wills
Wills are one of the less expensive options. You can name beneficiaries and dictate who gets what. Unfortunately, you cannot control how the money is used or spent. Wills do not help you control estate taxes either. Wills can also be contested, not allowing your wished to be implemented. Wills are also subject to probate which can be expensive.

UGMA/UTMA Custodial Accounts
Custodial accounts are for minor children. These type of accounts allow you to save for a child’s college education. The custodial account allows you to gift money to a minor child, to use for education related expenses.

Once the minor child hits 18 and attends college, technically it’s their money and they can spend it anyway they want. The custodial account is considered the child’s asset and can count against them for college financial aid.

Charitable Remainder Trust
Not sure why I don’t see this trust more often. You don’t have to be wealthy to be charitable, and you also don’t have to be wealthy to have a highly appreciated asset such as a stock or real estate. Let’s say you bought a stock years ago and have never sold it due to the taxes it would generate. With a Charitable Remainder Trust you donate the asset to the charitable trust, the trust sells the asset and provides a lifetime income to the donor, and to give the remainder of the assets in the trust to the named charitable organization after the donor has passed.

The Bottom Line
There are lots of ways to control your assets once you pass to the great beyond. If you need some help with your estate planning needs, feel free to write me at david@lexwealth.com  or call me at 859-225-2596. If you would like to get my articles every week, subscribe free right here!

Cambridge does not offer tax or legal advice.