The recent investing frenzy in stocks and cryptocurrencies during the coronavirus has led to a surge in the number of individual investors and the coining of new phrases such as “smart money” and “debt to wealth.” This interest in wealth is likely driven by the desire to achieve financial freedom for themselves and their families through better income. However, while it is important to accumulate wealth now, it is equally important to manage the wealth you already have.
One of the ways you can wisely manage your wealth today is through a trust, and this column is especially relevant if you’re thinking about retirement, estate planning, and tax savings.
A trust is a form of property management in which the trustor/grantor, who establishes the trust, entrusts the management and disposition of property to a trustee for the benefit of the beneficiary/heirs for a specific purpose. The trustee is usually a third party, but the grantor can also act as the trustee themselves.
Trusts have several advantages. For example, if you’re concerned about your children’s ability to manage and maintain your estate after you’re gone, either because they’re minors or because they have a spendthrift mentality, you can place property in a trust so that only certain living expenses are paid to them on a regular basis. Trust property is also effective in reducing the likelihood of disputes among your descendants over the distribution of your estate after you’re gone, because it must be administered according to the trust’s rules. Unlike property left in a will, property placed in a trust is confidential, which helps to protect privacy. In addition, trust property is protected from creditors and can provide tax savings in terms of inheritance taxes and other costs.
Some people set up trusts for themselves and their spouses as part of their estate planning. If you anticipate that you will no longer be able to manage your assets on your own due to age or illness, you may want to set up a trust to automatically pay you and your spouse for living expenses and medical expenses instead of leaving your property directly to your children. This can be beneficial in that it doesn’t place a financial burden on your children.
Trusts can be confusing because there are many different types of trusts, depending on what you’re trying to accomplish, the type of property you’re holding in the trust, or when you set it up. Basically, there are inter-vivos trusts and testamentary trusts, depending on whether the grantor is alive when the trust is created, and revocable trusts and irrevocable trusts, depending on whether the trust is revocable or irrevocable.
Irrevocable trusts are not subject to estate tax. Revocable trusts are subject to estate tax, but are exempt up to $11.7M in value per person as of 2021. While irrevocable trusts are free from estate tax, they are still subject to gift tax. If you want to avoid gift taxes, you can also use a generation-skipping trust, which allows you to name your lineal grandchildren (rather than your children) as beneficiaries of the trust property and avoid the generation-skipping transfer tax.
A common question that many people ask is, “Do I need a trust?” A common misconception is that trusts are only for the wealthy. However, many people can actually benefit from a trust because there is no minimum amount to open a trust, and it’s actually a form of wealth management. Trust property can include assets such as real estate, cash, or stocks and bonds; tangible assets such as precious metals, antiques, paintings, and gold bars; and even business interests.
So if you feel the need to organize your wealth for yourself and your children, we encourage you to consider opening a trust. You should consult with a professional attorney to get a full picture of your assets, what you want to accomplish with the trust, and how the trust will be handled after your death.
Dong Ho Song Law Firm I songlawfirm.com
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