There are many ways to leave a legacy. Trusts are only a small part of what you can do to preserve the one you’ve created. In this article, we’re going to explore what they do and what they don’t do.
We should start by acknowledging that trusts are not for everyone. They’re honestly not for the vast majority of people. Though there are perfectly valid reasons to form trusts and use them, they often get oversold as the item you desperately need. They’re not.
What is a Trust?
A trust is a legal device where one person gives assets to another to be held for the original or a third person. In a trust, there are three main roles: grantor, trustee, and beneficiary. Yes, a trust can have more than these three. However, these are what make up a trust at its core.
A grantor is the person who gives assets to the trust. The trustee is the person or entity that holds onto the assets and manages the trust. Finally, beneficiaries are those who benefit from the trust assets.
A beneficiary can be the grantor, but the trustee has to be different from the beneficiary. Although legally, a trustee can be a beneficiary, the conflicts really prevent this scenario if you’re setting up a trust correctly.
Therefore, short answer: a trust is a separate vessel for holding assets from one person for the benefit of another.
Why Would You Want a Trust?
There are many uses for a trust. Here’s a list of some of the more common uses:
- Build and protect a legacy.
- Keep certain assets out of probate.
- Lower inheritance and estate tax liability.
- Control your assets beyond the capabilities of a will.
- Qualify for governmental benefits.
- Care for a family member who cannot manage their own finances.
- Protect assets from creditors.
- Fund charitable causes.
- As a form of pre-nuptial agreement.
This is not an exhaustive list because trusts are extremely flexible. However, it gives you a good picture of what you can do with them.
Protecting Your Legacy
As mentioned above, you can use a trust to build and protect your legacy. Firstly, you need a legacy to protect. In most cases I deal with, that is a business. However, it can also mean some sort of intellectual property or just the wealth you’ve created in your lifetime.
You use a trust to protect this legacy by putting the appropriate limitations on what your beneficiaries can do. For example, if you’ve put your business in a trust, you can put limits on how/if your children can sell the business. You can also create limits on managerial decisions. There’s actually a lot of limits you can put in your trust.
But how is that enforceable? Trusts are pretty powerful vehicles. However, they do have limits. Generally speaking, you have the power to say “either follow my rules, or you get nothing (or less).” As long as you’re not demanding your beneficiaries do something illegal, that’s a generally enforceable stance to take. Some of these can get downright nasty. For example, there are trusts out there that the beneficiaries only inherit if they divorce their spouse or break up with a significant other the parent didn’t like.
Either do what I say or get nothing only works if there’s something left. Therefore, the more you have in the trust, the more likely your rules will survive long term. If the trust is ever out of resources, your beneficiaries will likely be able to dissolve it. That’s why it is important to think of every eventuality when drafting these.
Conclusion
Trusts can protect your legacy if done correctly and if you have enough of a legacy to protect using this particular legal vehicle. Trusts aren’t for everyone. However, when they’re used, they’re powerful devices.