Estate planning traditionally starts with a will, which allows you to list out which heirs get which assets. You can leave one child the car, for instance, while another gets the art collection. You can leave them both the house and let them decide what to do with it. Your will gives you a say in how your estate gets distributed.
However, that’s a pretty simple way to pass on your estate. What if you want to do something more complex? That’s when you use a trust. Instead of giving the money to an heir, you leave it to the trust. The trust comes with a set of rules and regulations that then determine how the money or other assets move on to your heirs.
You’ll see how these trusts can be far more complex than wills as we take a look at some of the most common types:
1. A special needs trust
When you have an heir with special needs, their ability to get government assistance largely depends on how much money they have. If you leave them money directly, that can cut off their assistance until the money gets used up. If you instead put it into a trust, then it belongs to the trust, not your heir. They can still qualify for assistance and get the assets in a more roundabout manner.
2. A charitable trust
A charitable trust is just another way to give money to a charity when you pass away. You can do this directly, but you sometimes face serious tax implications for doing so. Using a trust can help to avoid these tax penalties while still helping the causes that you support.
3. An asset protection trust
If you’re worried about creditors coming after the money in the future, you could put it into an asset protection trust. Even when creditors have a right to go after someone’s personal assets for unpaid debts, they cannot touch the money that is in the trust. This insulates it and protects it if you see some sort of financial calamity in the future.
4. An age-based trust
One of the most common trusts is one based around the age of the heirs. You may use this if the heirs are minors, for instance. You can specify how old they have to be to get the money. If your heirs are teens when you pass away, for example, the trust could hold the money for them until they become adults or reach any age — 25 and 35 are common — that you specify.
These are just four examples, but they help show how useful trusts can be. If you’d like to use them, make sure you know how to get started.