Deciding to Trust Your Assets
Americans are getting older, and their finances are becoming increasingly complex. According to Trusts & Estates, there are currently 350,000 US citizens with net worths of at least $2.5 million - and this number is growing.
From these numbers and all other evidence about out growing economy, we can assume that there's lots of growth going on in this club of wealthy individuals who need to shelter assets from taxes both before and after death. One tool for doing this is a trust, which is a catch-all term for many types of arrangements that can help make sure assets pass on to the right heirs, perhaps reduce taxes, and assure these assets managed professionally and effectively.
How a Trust Works
A trust is an agreement in which the owner of an estate (the "grantor") transfers the legal title to that estate to somebody else (the "trustee") for the purpose of benefiting one or more third parties (the "beneficiaries"). In setting up a trust, the grantor assures his or her assets will be distributed the way they want after death.
One reason for setting up certain types of trusts is for the tax benefits a will alone cannot provide. In most cases, a grantor can fund the trust up to the amount covered by the unified tax credit annually without owing federal gift taxes. In 2000, this credit amount is $220,550 for individuals, but will gradually rise to $345,800 by 2006. (For details on how this works, go to the IRS's explanation at http://www.irs.gov/prod/forms_pubs/pubs/...
Most trusts can also be distributed directly to beneficiaries without going first through a probate court, which could end up distributing an estate in a way the grantor never intended.
One of the main benefits of a trust for many grantors is the expertise a trustee provides (depending on who's chosen) in managing large sums of money or a complex distribution of assets. Depending on the type of trust the grantor can work with the trustee on major decisions, or the trustee can be assigned full authority to act on the grantor's behalf.
A trustee may be an individual such as an attorney or accountant, or an entity that offers experience in such areas as taxation, estate law, and money management. Trustees have what's called a "fiduciary responsibility" to act in the grantor's best interest according to professional standards.
Your Choice of a Trust
There are a wide variety of trusts, each designed to accomplish different goals for its grantors. Basically, trusts come in three types -
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