How Wills and Trusts Work, and Where to Start

When you read the words “trust fund” what comes to mind? Rich trust fund kids of Instagram showing off their conspicuous consumption? Or maybe the trustafarians. Rich kids pretending to slum it with the Bohemians while their parents pay off their American Express Black Card every month? How about the dozens of members of the notorious Walton family who are billionaires despite never having done a moment of work in their lives.

You see the point we’re making. When we think of trust funds, it doesn’t conjure up anything good. But there are excellent reasons to establish a trust fund. They aren’t something only super rich, high net worth individuals need.

A trust fund can allow your loved ones to avoid the lengthy probate process. It can reduce the amount of estate tax paid, a trust can spell out specific instructions for assets passed to a minor child in the event of a parent’s death.

And it can protect the trust’s assets from being claimed by creditors. And a trust can prevent your family members from going to war after your death. It’s hardly only the ultra-wealthy who fight over money and other assets.

People who know they need to establish a trust fund know they need to establish a trust fund. This article isn’t for them. It’s for those who don’t think they need to set up a trust fund.

We’ll explain what a trust fund is, who needs one, if you need a will too, and how to set up a trust. It’s easier and less expensive than you might think. Because you don’t want your pristine, still in the box Star Wars figurines going to just anyone!

What is a Trust Fund?

A trust fund is a way you can to set up a financially secure future for your loved ones by directing your assets to be managed and distributed according to your specific instructions. See? That’s something we all want, not just those with a net worth in the eight figures.

A trust fund is a legal entity that holds property or assets on behalf of another person, group or organization. Things like cash, real estate, stock, and businesses can be held inside a trust.

It’s an estate planning tool that holds your assets in a trust to be managed by a trustee, a neutral third party.

How a Trust Fund Works

There are three parties involved in a trust fund; the grantor, the trustee, and the beneficiary. The grantor is the person who establishes the trust and places his or her assets into the fund.

The trustee is the person or entity who holds and manages the assets in the trust. Choose someone familiar with your finances and your family, is conversant with financial management, and who is willing to oversee the trust. It’s a lot of responsibility.

If you don’t have someone in your life that fits the bill, you can choose a corporate trustee, a person with professional trust management experience.

The beneficiary is the person, persons, or entity (a charitable trust) you want to receive the trust assets.

When setting up a trust, you’ll decide what assets to place in the trust( cash, stocks, bonds, mutual funds, retirement accounts, real estate, personal property, etc.) and set stipulations for the trust. You might decide funds from the trust can only be used for things like educational expenses or the purchase of a first home.

Once placed in the trust, the assets are no longer belong to you. They belong to the trust and are managed by a trustee. Because you no longer own these assets, you aren’t required to pay income tax on money generated by those assets. With the right set up, the assets can also be exempt from estate taxes and gift taxes.

Who Needs a Trust Fund?

The amount of money you have is not the only determining factor when deciding if you need to set up a trust fund. But if you do want a number to help you decide, it’s probably less than you imagine. If you have a net worth of $100,000 or more, you should consider a trust.

A trust is beneficial if you have substantial assets in real estate, particularly out of state real estate. If you have a particular to how and when you want your assets distributed after your death a trust will ensure your wishes are carried out.

It seems controlling, and we suppose it is. But a trust can be a good “carrot” if you want someone to do something they may otherwise not do like go to college or enter a rehab program for addiction.

If you have a family member who is unable to manage their personal finance issues due to a disability or irresponsibility, a trust can protect their future when you’re no longer alive to look after them. In the case of a disability, leaving a lump sum inheritance directly may mean the person is ineligible for some types of government support.

What is a Will and How Does it Work?

A will is a legal document that expresses the wishes of a person as to how their property (owned in your sole name at the time of your death) will be distributed upon their death. And it names an executor who will manage the estate until final distribution — a little more straight forward than a trust.

A will only go into effect after your death after which it passes through probate. This means a court oversees the administration of the will, ensuring it’s valid and the property goes to those named in the will.

During the process, the judge hears any objection to the will and makes sure creditors receive payment out of the value of the estate. The estate must pay a fixed percentage of its value to court fees. The fees vary by state but are typically between 3% and 10%.

The judge makes sure the executor performs his or her duties according to the will’s instructions. Probate can last years.

The probate process involves a good many steps, all of them necessary to move assets from the ownership of a deceased individual into the ownership of a living beneficiary. His taxes and outstanding debts must be paid as well before this can happen. Some estates settle or close within a few weeks or a few months, while others can take a year or longer.

Wills are a matter of public record meaning anyone has a right to know the contents of your will. Your will is the place to name a legal guardian for minor children and to specify your funeral arrangements.

You can amend your will anytime, and a will should be reviewed periodically along with the beneficiary designations of things like your retirement accounts and life insurance policy.

Who Needs a Will?

There are certainly more people who could benefit from having a trust that people that have them. But it’s true that not everyone needs a trust. The same isn’t true of having a will. It doesn’t matter what your financial situation is; you need a will.

If you die without a will, a court gets to decide who gets your personal property and other assets. And more importantly, will decide who has guardianship of your minor children should their other parent also be deceased or otherwise not able or willing to care for them.

What is the Difference Between a Trust and a Will?

It’s understandable that people might be confused over the difference between a trust and a will because while there is some overlap, there are some very distinct and significant differences.

• A will doesn’t go into effect until your death. A living trust goes into effect as soon as it’s signed. This is important because a trust will govern your assets and minor children should you become incapacitated to the extent you cannot make decisions.
• A trust gives someone else the power to manage assets on behalf of your beneficiaries who you’ve determined cannot manage them responsibly on their own. A will doesn’t allow for this option. A trust lets you control the distribution of your assets while a will bestows them in a lump sum.
• Wills require probate which can be costly and time-consuming. A will is also a matter of public record once it’s filed with the court meaning everyone will know what money and assets you left behind. A trust does not have to be filed with the court meaning it does not go through probate nor is it a public record.

Do You Need a Trust Fund and a Will?

Not everyone who needs a will needs a trust, but everyone who has a trust needs a will. Each is a useful estate planning tool that serves a purpose and used together; they can build a complete estate plan.

A trust lets you put conditions on the way your assets are distributed and often reduces tax liability. But you still need a will as most trusts only deal with specific assets but not the entirety of your holdings.

Damn, What’s All This Gonna Cost?!

Maybe part of the reason only rich people had trust funds is that setting up a trust was an expensive process involving a trust attorney. But much like investing, the internet has democratized creating a trust.

Trust&Will can provide you with a range of estate planning products faster and much less expensively than ever before. Trust&Will has created software that can help you create a will in about 15 minutes and a trust in about an hour. Once your plan is finalized, you can print (or have them shipped) the documents, sign them and have them notarized.

Types of Trusts

Trust&Will provides the following documents which are required for a complete Trust-Based Estate Plan.

• Revocable Living Trust: This is the centerpiece of your estate plan with provisions to manage, control. And distribute your assets during your lifetime and after your death.
• Schedule of Assets: A listing of the assets to be held in trust and subject to the trust’s provisions. This document can be updated as needed when you remove or add assets to the trust.
• Pour Over Will: This contains the final wishes you have for dependents and arrangements outlined explicitly in the trust.
• Medical Power of Attorney: Name and empower the person you want making decisions about your health and medical care if you are not able to.
• HIPAA Authorization: Allows designated individuals access to your protected health information for specific purposes.
• Living Will: You can specify your preferences regarding healthcare and medical treatment should you be unable to make decisions for yourself.

Types of Wills

Trust&Will provides the following documents for a complete Will-Based Estate Plan.

• Last Will & Testament: Outlines your final wishes for your personal property, dependents, and funeral arrangements.
• Medical Power of Attorney: Name and empower the person you want making decisions about your health and medical care if you are not able to.
• HIPAA Authorization: Allows a designated individual access to your protected health information for specific purposes.
• Living Will:  You can specify your preferences regarding healthcare and medical treatment should you be unable to make decisions for yourself.

If you need to appoint a guardian for your children but aren’t ready to make a will, Trust&Wills offers a solution.

• Nomination of Guardian: You can specify the person you want to look after your minor children without having to create a will.

Don’t Wait

We know that none of you likes to think about death, but it’s inevitable, and you have no idea when. Someone close to me lost a sibling two years ago. He was 64, a doctor, and seemingly fit. And he dropped down dead of a heart attack.  At 64.

For the majority of us, the most important thing in our life is the well being of our family. We work hard for them; we take care of them. But how can you do that when you’re no longer here? By establishing a trust fund and a will.

Don’t wait; there’s no reason to. You can finish reading this, spend a few minutes and a few hundred dollars and make sure your family is taken care of. Because what else is there?

Show Notes

18 Watt Session IPA: An IPA from SingleCut. 

Fruh Kolsch: A German-style beer