Trusts are among the most versitile tools your lawyer has to assist you in protecting your assets and in making provisions for your loved ones. There are many different kinds of trusts which may be employed to suit a variety of family and financial circumstances.
The best way to understand a trust is to imagine a basket into which you may place assets including cash, stocks, bonds as well as real estate. The contents of the basket can only be applied to the good and welfare of the beneficiaries designated by you. The trustees you designate are the only ones empowered to administer the assets of the trust which are generally insulated from all of the creditors of the benificiares. Even the government is often unable to gain access to the trust assets of a trust. A specific and well-detailed set of instructions —the trust instrument— sets forth exactly how the assets of the trust are to be maintained and invested together with the terms and conditions for making the income and assets available to the named beneficiaries.
Not everybody needs a trust. Every spring when the snowbirds return to New York from Florida, I always field a host of inquiries about whether or not some of my clients should establish trusts. This is a sure sign they have been attending meetings at the clubhouses of their developments where presentations are invariably made by those who would equip us all with trusts at birth. Unfortunately, it is common that folks come back home demanding trusts without having the slightest clue as to what a trust really is or how it might be of use to them.
Trusts are not only for the rich and famous. In fact, one of the most important types of trusts is the “special needs trust”. This trust vehicle is normally used to safeguard assets set aside for physically or mentally challenged adults who may have nothing else of their own.Usually these folks are unable to support themselves and are recipients of social services thereby making it legally impossible for them to keep even relatively small amounts of cash in their own names. By creating a special needs trust for s special adult, it is possible for that person to have some money set aside for some of the little niceties of life –new clothing now and then, toiletries or an occasional show — that make living worthwhile for all of us.
Trusts are important legal devices to help you save taxes. It may well be possible to shelter more than a million dollars from exposure to estate taxes which may run as high as sixty percent. A testamentary trust in your will can literally allow you to direct the administration of your assets from the grave to insure that your family will be cared-for long after you are gone. Living trusts enable you to shield the assets of your trust from creditors while you receive the benefit of these funds during your lifetime.
There are often serious tax implications of trusts which can vary depending upon the way the trust instrument is drawn and implemented. An example of this is what happens to the income generated by a trust. Where trust income is paid the the beneficiaries, they pay taxes upon what they receive based upon the tax rates for earned income. If the same funds are retained in the trust and not paid out, the trust must pay taxes at a rate of 36% after the first fifteen hundred dollars earned.
As useful as trusts can be for managing your wealth, they can also be fraught with pitfalls. Running afoul of tax regulations can cost you a bundle. Failing to properly implement a trust can cause you to be worse off than when you started. Remember also that if you place your assets into an irrevocable trust, the future of those assets is written in stone and you will be bound by the plan you have put into place. While it is often very useful and beneficial for you to establish a trust, it is essential that you rely upon your tax advisor and a capable attorney before committing to this course of action.