Selecting the wrong trustee is easily the biggest blunder parents can make when setting up a trust fund. As estate planning attorneys, we've seen first-hand how this critical error undermines so many parents' good intentions.
Trusts offer amazing benefits, but they also come with potential downsides like loss of control, limited access to assets, costs, and recordkeeping difficulties.
The primary advantage of setting up a family trust is to ensure your immediate family members get the financial resources they need after you die. Family trusts do an outstanding job of protecting assets such as your home, automobiles, and liquid financial instruments.
A family trust is a legal entity that holds assets for the benefit of designated family members. Family trusts can help protect assets from creditors, reduce estate taxes, and help provide for minors or dependents with special needs. There are many types of family trusts, each with its specific purpose and benefits.
Establishing and maintaining a trust can be complex and expensive. Trusts require legal expertise to draft, and ongoing management by a trustee may involve administrative fees. Additionally, some trusts require regular tax filings, adding to the overall cost.
The main benefit of putting your house in a trust is to bypass probate when you pass away. All your other assets, regardless of whether you have a will, will go through the probate process. Probate in real estate is the judicial process that your property goes through when you die.
Disadvantages of a Family Trust
The initial setup fees and ongoing administrative costs can add up over time, making it a less attractive option for some families. Loss of control: Once assets are placed in a family trust, the original owner relinquishes control over them.
It can be advantageous to put most or all of your bank accounts into your trust, especially if you want to streamline estate administration, maintain privacy, and ensure assets are distributed according to your wishes.
You designate a trustee who will manage the assets for your benefit and the benefit of your chosen beneficiaries. The key distinction is that you retain full control and ownership over the trust and its assets while you are living.
There are also some potential drawbacks to setting up a trust in California that you should be aware of. These include: When you set up a trust, you will have to pay the cost of preparation, which can be higher than the cost of preparing a will. Also, a trust doesn't provide special asset or estate tax protection.
Once dominant in a market, critics alleged, the trusts could artificially inflate prices, bully rivals, and bribe politicians.
Your Assets Might Not Be Protected: Another crucial point to note is that not all trusts offer protection from creditors. For instance, in revocable trusts, the assets are not protected from creditors as the grantor retains control of the assets. Potential Tax Burdens: Finally, trusts can carry potential tax burdens.
There are a variety of assets that you cannot or should not place in a living trust. These include: Retirement accounts. Accounts such as a 401(k), IRA, 403(b) and certain qualified annuities should not be transferred into your living trust.
Disadvantages of Trust Funds
Costs: Setting up and maintaining a trust can be expensive. Loss of Control: Some trusts mean giving up control over your assets. Time and Compliance: Maintaining a trust requires time and adhering to legal requirements. Tax Implications: Trusts can sometimes face higher income tax rates.
Trusts are an excellent estate planning tool for Californians as they provide asset protection. Although someone generally can't bring a lawsuit against a trust, filing a claim against the trustee can occur.
Many advisors and attorneys recommend a $100K minimum net worth for a living trust. However, there are other factors to consider depending on your personal situation. What is your age, marital status, and earning potential?
Bank Accounts Held in Trust
After your death, when the person you chose to be your successor trustee takes over, the funds will be transferred to the beneficiary you named in your trust document. No probate will be necessary. To transfer the account to your trust, tell the bank what you want to do.
For example, Gargiulo and Ertug (2006) identify what they call the 'dark side' of trust as occurring when the trustor strays beyond a critical threshold of confidence such that her trust in another becomes inappropriate and ill-judged.
A family trust ensures that your assets are managed according to your wishes on behalf of your beneficiaries. So let's say you have $5 million in assets and you want to divide it between your children. You can use a family trust to specify when they can access their share of your assets and under what terms.
The trust loss provisions generally don't apply to trusts that have validly elected to be a family trust. This is except for the income injection test, which applies in certain circumstances. If the trust terminates before the losses can be offset against income, they are permanently lost.
Parents and other family members who want to pass on assets during their lifetimes may be tempted to gift the assets. Although setting up an irrevocable trust lacks the simplicity of giving a gift, it may be a better way to preserve assets for the future.
Parents often make the mistake of choosing a trustee based solely on personal relationships without considering their financial acumen, integrity, and willingness to serve. Choosing one of the children is not always the best choice as other beneficiaries may see their role with suspicion.
Trusts usually end when the settlor dies or when one of the beneficiaries dies, but sometimes a trust ends after a certain period of time or after a certain event takes place, like when a beneficiary gets married or reaches a certain age. There are other reasons a trust can end, however.