I wish that financial education was taught in public schools. What is a trust, what are some benefits, and who is it a good option for?
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A trust is just assets with instructions of how to disperse (or sell) those to the beneficiaries. If the beneficiaries are minors then an adult will have control of it (level of control depending on the instructions).
To start, you need to understand a legal fiction, which is essentially something we made up in the law for a particular purpose. Some legal fictions separate ownership and control. Most of the time, you would think ownership comes with control. We invented trusts to separate ownership of some assets from control of those assets (usually for tax or government-related purposes).
You set up a trust to own assets. And you set rules to control those assets. And you appoint a person, called a trustee, to exercise the rules that control the assets. And you do all this to benefit someone or something, called a beneficiary. And you do all that to ensure the assets are protected from certain taxes or other government-related attempts to diminish their value.
Some trusts provide for easy transitions of property when someone dies (better than a will). Some trusts ensure some people have nearly-permanent wealth that they never earned. Some trusts protect property from development.
The point is a trust is a legal fiction that owns assets for the benefit of another person or thing.
You wish you were taught in public school about how to be born in a rich family and inherit large sums of money once you’re of legal age?
Me too brother.
A trust is simply a legal entity – like a corporation almost. The difference is that the trust document spells out exactly what the money is to be used for. The benefits all have to do with estate planning – you get to decide what happens to your money when you die (actually when alive too for some types of trusts). The option is good for estate planning and potentially some tax planning. The cons are the expense and hassle – legal fees, accounting fees, and the hassle of maybe wanting to do something different with the money after you set it up.
A trust is a set of cash/assets managed by a person or persons (trustees) for the benefit of a person or persons (beneficiaries), with instructions about how those assets are supposed to be managed by the trustees.
For example, if you want to bequeath cash to a minor, but you don’t think that person is sufficiently mature or responsible yet, or maybe you’re afraid that the minor’s guardians will take the money if you simply give it to the minor, you could set up a trust with instructions that the minor be paid over time, or after the age of 18, etc.
“I want my kid to have all the money I earned in my life, but I don’t want him to have it at age 14 or he’ll just spend it foolishly”
A trust is a legal entity that is set up to pay the recipient a stipulated amount (or percentage) of the money being held upon attaining certain milestones.
The executor of the trust has a job to invest the money inside a trust safely so that it doesn’t disappear due to market fluctuations and also must pay out the appropriate amount of money at the appropriate time.
A trust can be beneficial for some circumstances (children, persons with diminished capacity), but may not be necessary in cases when the recipient is already in a good financial position.
I used to manage estates and trust accounts. I remember having one for twins. There was a provision that allowed them to encroach upon the capital (i.e. receive early payout) if it would provide a meaningful quality of life. This was such a fluffy and bullshit sentence and it meant that these guys would call once a week wanting money to pay rent, buy a car, buy a camera, take a vacation, etc… it all qualified as meaningful quality of life. They ran out of money very quickly and I’m sure their parents were rolling in their graves.
Also had another interesting case where the trust was set up for the son. The son went crazy and killed his mom (father was already deceased). In theory, murdering someone to benefit from their trust account is a nono, but in this case, he was proven to be insane, so he was entitled to the money. Unfortunately due to his insanity, he had to stay permanently in the penitentiary. The net result was that we were sitting on millions of dollars, and the poor guys commissary to buy chips and snacks was always full at $100.
If you take care of your money right, it makes little money babies just like bunnies do.
If you put enough money in a special yard with other money, it makes enough baby money that you can roll around in a constant stampede of new baby money.
Sometimes you want to make sure your kids can enjoy all those little money babies, but kids don’t understand how important it is to make sure you don’t start playing with all that grown up money you put in the field (that’s for grown ups).
When that happens, you tell the farmer, “my kids can play with all the baby money, but don’t let them touch the grown up money until they’re all grown up.”
Trusts can be beneficial to special needs children. It’s not just for the wealthy.
My daughter, who will likely be unable to work as an adult, will inherit my money and house from my will.
That money goes into a trust, and she can take out money in small amounts to pay for utilities, food, transportation, healthcare, a yearly vacation, etc. It’s all clearly documented in the trust.
Meanwhile, she won’t be taxed on that amount. That’s useful since she needs all that money to live on since she can not support herself. And it’s a burden to have her live with my siblings and have them foot the bill entirely. Instead, my sister can be the trustee from a distance.
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