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Should I Have a Trust?

Trusts are often associated with the very wealthy, who want to pass on their wealth to future heirs. However, there are many good reasons to set up a trust, even if you aren’t “rich.” In general, I recommend trusts for my clients when any one of the following factors are present:

  1. The client owns any real estate;

  2. The client has over $150,000 in cash or stock;

  3. The client owns a business or has interests in a business;

  4. The client is in a blended family situation; or

  5. The client values privacy in their financial affairs after they pass away.

U.S. News & World Report’s recent article, “Setting Up a Trust Fund,” explains that a trust fund can be made up of assets like stocks, cash, real estate, bonds, collectibles, or even a business, that are then distributed privately and without court involvement after a death. The person setting up a trust fund is called the Grantor (also referred to as a Settlor or Trustor), and the person, people or organization(s) receiving the assets are known as the Beneficiaries.

The person the grantor names to ensure that his or her wishes are carried out is the Trustee. The initial trustee is often the same as the person setting up the trust (the grantor), with one or more persons named as backup trustees if the initial trustees can no longer manage the trust property due to death or incapacity.

While this may sound a lot like drawing up a will, they’re two entirely different legal vehicles…

A will does not even take effect until a person dies. Therefore, it offers no benefit if a person who wrote the will becomes mentally or physically incapacitated.  In other words, it does not allow someone to handle a bank account, sell property or pay a person’s bills if they cannot do so while they are alive. The will merely provides instructions on who shall receive a person’s assets after they die. Moreover (and this is very significant) a will must be filed with the local probate court after a person dies, and a court supervised probate administration must often follow. The probate administration process is for the purpose of validating a deceased person’s will, inventorying their assets, which become a matter of public record that anyone can access (such as people looking to develop sales lists), ensuring that all creditors are notified and debts paid, and essentially inviting any interested potential heirs in to challenge the will.

A trust, on the other hand, is typically created during a person’s lifetime and holds his or her assets (or both his and her assets in the case of a couple) throughout lifetime, with instructions on how the trustee is to distribute assets during the lifetime of the grantor (including during incapacity of the grantor by paying bills, selling property, etc) and after a death occurs. Since the assets are in the name of the trust, there is not court process required for the backup trustee to manage the trust assets if the grantor becomes incapacitated, or to distribute the assets as stated in the trust document following the death of the grantor.

Trusts also have several other benefits. A properly drafted trust can help reduce estate and gift taxes and considerably reduce the time and expense required to transfer assets following a death. Moreover, with a trust, you can establish rules and guidelines on how beneficiaries spend the money and assets allocated through provisions. For example, a trust can be created to guarantee that your money will only be used for a specific purpose, like for college or starting a business.

A trust fund can also be set up for minor children to distribute assets to over time, such as when they reach ages 25, 35 and 45. In fact, these days it is common for parents to choose to leave their children’s inheritance in an asset protection inheritance trust for the child’s lifetime after the parent passes away, which allows the trust funds to be used as needed, with the balance of the assets having protection from issues such as divorce, lawsuits and/or creditor problems. A special needs trust can be used for children with special needs to protect their eligibility for government benefits.

At the outset and before signing anything, you need to evaluate the purpose of the trust (because there are many types of trusts). To choose the best option, talk to an experienced estate planning attorney, who will understand the steps you’ll need to take, such as properly creating the trust, choosing successor (backup) trustees, customizing its provisions for your particular situation, transferring assets to the trust, and ensuring that beneficiary designations for all non trust assets are properly integrated into the plan. Trust law varies according to state, so that’s another reason to engage a local legal expert.

Reference: U.S. News & World Report (November 8, 2018) “Setting Up a Trust Fund”


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