Do I Need a Trust?

By Pam O’Brien · September 19, 2023 · 7 minute read

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Do I Need a Trust?

Where do you want your money and your assets to go when you die? It’s an important question to think about.

A trust might help ensure that the person or people you want to benefit from your assets will be honored. Using a trust can often provide tax benefits as well as the ability for assets to change hands outside of probate. This can all be done with the help of a trustee, a person given control of a trust so that they can legally administer it according to specific wishes.

Here’s how a trust works, the different types of trusts, and how to decide if a trust is right for you.

What Is a Trust?

The IRS defines a trust as “a legal arrangement which can help you to control your assets and possessions. Often, trusts can help to reduce taxes on your estate and speed up the process of allowing beneficiaries access to those assets.”

A trust can hold cash, stock, real estate, and any other assets. You might meet with an attorney who specializes in trusts to officially name your beneficiaries and dictate how you want the trust to be handled.

You could also apply special rules to your trust, like how often the beneficiary can receive a payment from it, or how the money can be used (say, for education expenses or to buy a home).

The beauty of a trust is that you get to decide and control how you want your assets to be used.

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The Difference Between a Trust and a Will

After someone dies, the legal process to settle an estate and distribute assets, also known as probate, begins. The probate process goes through a court of law and a judge will validate any existing will for the distribution of assets.

If you have a trust, the probate process could be skipped, which might save time and ensure assets go to the chosen beneficiaries. (It’s important to note that if you die and don’t have a will or a trust, assets are distributed according to state law.)

Other major differences between a will and a trust include these factors:

•   A will goes into effect only after you die. It’s also called a “last will and testament.”

•   A trust can go into effect while you are still alive.

The Difference Between a Trustee and a Beneficiary

A trustee holds legal title to the property or assets of another person, the beneficiary. A trustee is responsible for administering the trust on behalf of those beneficiaries.

There are at least two two types of beneficiaries:

•   One who receives income from the trust during their lives

•   One who receives the remainder of the estate after the first set of beneficiaries dies

Choosing the Right Type

A Living Trust

A living trust is similar to a will, but not exactly the same. A living trust is a legal arrangement that you (the grantor) create during your lifetime (like a will), but instead you specify exactly the way you want your estate handled while you are still alive. A living trust might be used for people who have complex financial situations and more than one beneficiary.

When you die, the trustee you appoint carries out your instructions without having to go through the legal process of probate. A living trust might be more effective than a will in carrying out the transfer of assets according to your wishes. Types of living trusts include:

•   A revocable trust. This gives you continued control and access to the assets in the trust as well as the option to make changes to beneficiaries or even revoke the trust whenever you want. A revocable trust keeps your decision-making flexible and fluid. Once you die, the revocable trust becomes irrevocable, and whatever wishes you’ve listed become final.

•   An irrevocable trust. This cannot be changed, modified, or adjusted without the permission of the beneficiaries. That means that any assets transferred into an irrevocable trust cannot be taken back. Irrevocable trusts might be appropriate for those who want to permanently remove assets from their estate.

The IRS lists assets that are often included in an irrevocable trust as insurance policies, cash, and business investments. Once the ownership passes to the beneficiaries, the assets listed in the trust are no longer taxable as part of the individual’s estate.

Testamentary Trust

Then there is a trust that is not considered a living trust:

A testamentary trust is created by the person who writes a will, called a “testator.” These are not to be confused with living trusts. This type of trust would not go into effect until the death of the testator.

A Few Things to Consider

You may have to consider attorney fees if you set up a trust with the help of a lawyer — there are also options to set up the trust on your own online. A good trust attorney should know the best ways to make your trust as airtight and efficient as possible. You may want to keep in mind the potential ongoing costs of maintaining a trust as well.

For instance, depending on the type of trust established, the trust may become its own tax entity, and you might need to be prepared to pay an accountant to file a trust tax return each year. Should you elect to have a corporate trustee, where someone from a bank or trust company acts as trustee for the trust, there are typically ongoing fees associated with that service as well.

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How to Choose a Beneficiary for Your Trust

Your beneficiaries will likely be members of your family. But a beneficiary of a trust can also be a group or an institution (like a nonprofit organization or a charity). Ultimately, your beneficiary is anyone or any group that receives beneficial enjoyment from your assets, like income, the ability to use property, or ultimate ownership, per your wishes.

Where to Hold a Trust

Setting up a trust could ensure that your beneficiaries get what you intended them to have before and after you die. The IRS recommends opening a bank account for a trust, which would require the following:

•   Legal documents and identification that proves you are the legal trustee

•   A Trust Tax ID number

When opening a trust bank account after the grantor has passed away, you typically need a new Trust Tax ID number to replace the Social Security number of the deceased grantor. This number will be used on every trust-related document going forward.

Trusts and Taxes

Establishing and funding trusts could help you remove assets from your estate and reassign ownership to others. This might help reduce income taxes on the assets if transferred to a beneficiary in a lower tax bracket, or help you reduce or avoid estate and gift taxes.

Are Trusts Only for “Trust Fund Babies”?

No, trusts are not only for trust fund babies. Although the common perception might be that trust funds are only for children of the super wealthy, that is not the case. A trust fund is meant to help you make sure your money goes to whom you want it to, and that it’s put to use the way you wish. If you have children or grandchildren, and you want your money to be used in a certain way by them, a trust might help you do that.

Financial Planning for the Future

When it comes to trusts, laws can change and they can also differ from state to state. You might want to consider consulting an attorney who specializes in trusts for the most updated direction and advice.

If you’re working on financial planning based on your specific financial goals and life situation and thinking about ways to save and invest for the future, you may want to consider setting up an investment account. You could also consider talking with a SoFi Financial Planner about such topics as budgeting and saving.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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