Trust Funds: The Real Deal on Pros and Cons of Setting One Up

Not sure if a trust is right for your future? You’re not the only one. A lot of people think that trusts are only for very rich people, but that’s not always the case. I’ve spent weeks researching this subject to give you the honest truth about whether or not setting up a trust is a good idea for you.

What Exactly Is a Trust?

Let’s be clear about what we’re talking about before we get into the pros and cons. A trust is a legal arrangement in which you (the grantor) give someone else (the trustee) control of your assets so that they can help certain people or groups (the beneficiaries).

You can think of it as putting your things in a special box with clear instructions on who gets what and when they get it, even after you’re gone.

There are two main types of trusts you should know about:

• Revocable Trust (also called a living trust): You maintain control and can change the terms whenever you want during your lifetime.
• Irrevocable Trust: Once established, it’s generally permanent and you give up control of the assets.

The Upside: Major Advantages of Setting Up a Trust

1. Avoiding the Probate Process

One of the biggest reasons people set up trusts is to skip the whole probate thing. If you’ve never dealt with probate before, consider yourself lucky!

Probate is the court process by which your will is confirmed and your things are given to the right people. It’s often:

• Time-consuming (can take months or even years)
• Expensive (court fees and attorney costs add up quick)
• Public (anyone can see what you owned and who got it)

With a properly funded trust, your assets transfer directly to your beneficiaries, often within weeks instead of months or years. This saves your family both time and money during an already difficult time.

2. Privacy Protection

Unlike wills that become public record during probate, trust agreements stay private. Nobody needs to know your business! This confidentiality protects sensitive financial information and the identities of your beneficiaries from nosy neighbors or opportunistic strangers.

As the folks at Arenson Law Group point out, “any asset distribution under a trust will happen quickly and be invisible to the public eye.” That privacy can be especially valuable if you’re disinheriting someone or have complex assets you’d rather keep quiet.

3. Maximum Flexibility and Control

When I set up my own trust, the thing I loved most was how much control it gave me over exactly how and when my assets would be distributed.

With a trust, you can:

• Set specific conditions for inheritance (like reaching certain ages or milestones)
• Establish funds designated for particular purposes (education, first home purchase, etc.)
• Create protections against beneficiaries’ potential creditors or divorcing spouses
• Make provisions for family members with special needs without disqualifying them from government benefits

For example, you could allocate money specifically for your grandchild’s college education that only gets released when they enroll, or funds for a first house that become available after they get married.

4. Asset Protection Benefits

Certain trusts (particularly irrevocable ones) can provide significant asset protection. Once assets are transferred to an irrevocable trust, they’re generally no longer considered yours, which means they may be protected from:

• Creditors
• Lawsuits
• Certain tax liabilities

This separation of ownership can be a powerful way to safeguard wealth for future generations.

5. Potential Tax Advantages

Depending on the type of trust you establish, there may be significant tax benefits:

• Assets in certain irrevocable trusts may be excluded from your taxable estate
• This could potentially reduce estate taxes if your estate exceeds the exemption threshold
• Some trusts allow for income splitting or other tax planning strategies

The Downside: Disadvantages to Consider

1. Upfront and Ongoing Costs

Let’s be real – trusts aren’t cheap to set up. The initial expense includes legal fees for drafting complex trust documents, which typically range from $1,000 to $3,500 or more, depending on how complicated your situation is.

And the costs don’t stop there. Trusts often have ongoing administrative expenses:

• Trustee fees (if using a professional trustee)
• Accounting fees
• Investment management fees
• Other administrative costs

These expenses can add up over time and reduce the overall value of your trust.

2. Administrative Complexity

Managing a trust isn’t always straightforward. There’s paperwork involved – sometimes lots of it. Trustees have to navigate complex regulations, tax laws, and fiduciary responsibilities, which can be time-consuming and may require professional help.

One crucial step many people mess up is properly funding the trust. This means you need to retitle assets in the name of the trust. If you skip this step or do it incorrectly, some assets might still end up going through probate anyway, which defeats a major purpose of having the trust in the first place!

As Arenson Law Group cautions, “We advise our living trust clients to ensure their real estate, vehicles, accounts, and other financial products are in the name of the trust.”

3. Loss of Control with Irrevocable Trusts

If you opt for an irrevocable trust, you’re essentially giving up control of those assets forever. Once they’re transferred into the trust, you generally can’t take them back, even in a financial emergency.

This permanence means you typically can’t change the trust’s terms or beneficiaries without meeting specific (often difficult) conditions. That’s a big commitment and requires careful consideration before proceeding.

4. Tax Complications

While some trusts offer tax advantages, others can actually create tax headaches:

• Certain irrevocable trusts may be subject to higher income tax rates than individual taxpayers
• There might be gift taxes related to transferring assets into a trust
• Some trusts require filing separate tax returns, adding to your administrative burden

Understanding and planning for these tax implications is essential to avoid unexpected tax burdens.

Who Should Consider a Trust?

Trusts aren’t just for the ultra-wealthy. You might benefit from setting up a trust if:

• You have minor children or dependents with special needs
• You want to control how and when your heirs receive their inheritance
• You own property in multiple states (avoiding multiple probate proceedings)
• You want to keep your financial affairs private
• You’re concerned about potential estate taxes
• You want to protect assets from potential creditors or lawsuits

Types of Specialized Trusts for Specific Needs

Depending on your situation, you might consider one of these specialized trust options:

How to Set Up a Trust

If after weighing the pros and cons, you decide a trust is right for you, here’s how to get started:

1. Determine what kind of trust fits your needs – Consider consulting with an estate planning attorney about your specific requirements.

2. Create a trust document – Your attorney will help draft this, or you can use online estate planning software for a more affordable DIY approach.

3. Get it signed and notarized – Depending on your state laws, you may need multiple signatures and witnesses.

4. Open a trust account – This can hold various assets including cash, stocks, bonds, real estate, and other property.

5. Transfer assets into the trust – This is the funding process where you retitle assets in the name of the trust.

My Personal Take

After researching and talking with dozens of folks who’ve set up trusts, I believe they’re worthwhile for many situations – not just the super-rich. The peace of mind knowing exactly how your assets will be handled and distributed is valuable.

However, I’ve also seen people rush into complex trust arrangements without fully understanding the commitments involved. My advice? Take your time, ask lots of questions, and work with a qualified professional who can tailor solutions to your specific situation.

Remember that trusts and wills often work best together as part of a comprehensive estate plan. Many people use a simple will as a “backup” to catch any assets that weren’t properly transferred to their trust.

Bottom Line: Is a Trust Right for You?

The decision to establish a trust depends on your individual circumstances, including:

• The size and complexity of your estate
• Your family situation
• Your privacy concerns
• Your tax planning needs
• Your desire for control over asset distribution

While trusts offer significant benefits like probate avoidance, privacy, and control, they also come with costs and administrative responsibilities that shouldn’t be overlooked.

Have you set up a trust or are you considering one? What aspects are most important to you? I’d love to hear your thoughts in the comments below!