When you decide to create a Trust, you’ve already won half the battle. Setting up a Trust can be one of the most prudent financial decisions that you’ll make in your lifetime. Why’s that? Well, while earning and saving, building up your accounts and investments, and providing for your family is one part of your financial life, there’s another side of wealth management: what you intend to do with your holdings when you’re ready to pass them along to the next generation.
Deciding to create a Trust is half the battle. It is a way to transfer some or all of what you have to one or more heirs while bypassing some of the usual Estate-settling matters like probate court and tax burdens. But what’s the other half of the battle? It’s choosing the right type of Trust for your needs.
If you have a house, a car, a savings account, a retirement account, a pension, an annuity, stock or other investments, gold, silver, a rental property, a vacation home, business, or any combination of these things, you have an Estate. The valuables in your Estate are known as your assets. And at some point, you’ll have to decide what to do with these assets. One option for giving some of all of your assets to another person or distributing those assets among several people is to transfer them using a Trust.
What is a Trust?
In its most basic sense, a Trust is a way to transfer assets from one person to another. A Trust is a legal agreement that allows one person, the Trustor, to give another person, the Beneficiary, an asset. The Trust is managed by a person known as the Trustee.
There are different types of Trusts and each type has its own rules and stipulations. Various types of Trusts are put to use in the corporate world as well as the private sector can be used for large acquisitions as well as small property transfers and can be used by families with considerable wealth and families of more modest means alike.
Choosing the correct Trust for each purpose is key. The type of Trust agreement that should be created can depend on:
The type of asset that is being transferred
The amount of management the asset or assets will require
The asset’s potential to generate income
The age of the beneficiary – over or under the age of 18
The beneficiary’s capability to manage the assets
Whether the Trust will take effect while the Trustor is alive or after they die
Other unique circumstances in the lives of the parties entering into the Trust agreement will also apply when considering if making a Trust is necessary, as well as determining which type of Trust is appropriate. Marriage, divorce, the birth of new children, and the deaths of family members can affect how you want assets to be distributed, and to whom. Debts and creditors can factor into the equation. And protecting property against predatory actions and fraud can also sometimes be necessary. Trusts can be created, and amended, for these reasons.
What is a Directed Trust?
One type of Trust that has become popular is a Directed Trust. In this agreement, there is a Directed Trustee in addition to the Trustor, Trustee, and Beneficiary. Directed Trusts are typically used to handle investments. A Directed Trust divides the responsibility for the management of the Trust between at least two people (the Directed Trustee and another designated Trustee), and often more than that.
How does a Directed Trust work?
In a Directed Trust, the Directed Trustee is directed by other participants in the Trust, such as financial advisors and a distribution committee, on matters relating to how the Trust is executed. The Directed Trustee does not have the power to decide how the assets in the Trust are managed, they cannot advise or invest for the Beneficiary. They are in charge of handling certain tasks relating to the management of the Trust and its income, following the terms of the Trust and the direction of those chosen to advise them about the Trust.
In recent years, some states have implemented the Uniform Directed Trust Act to recognize the increased use of Directed Trusts. But to use a Directed Trust, you don’t have to live in one of the states that have enacted legislation relating to these types of Trusts. To use a Directed Trust, however, your Estate should meet certain criteria that make a Directed Trust the most appropriate choice of Trust.
Who might need a Directed Trust?
A Directed Trust is not needed in every Estate Planning case. A Directed Trust is used primarily for investment accounts when the asset or assets in a Trust are likely to generate regular income and some degree of administrative management is required.
If a Trustor has stock that will generate dividends, an annuity, income property, or another asset that generates income, a Directed Trust may be the right option. If assets and their revenue are to be divided regularly among several beneficiaries, having a middleman of sorts – a Directed Trustee – to handle the distribution of that revenue and see that the initial investment is protected per the Trustor’s wishes and managed per the Trustee’s instructions, can be helpful. And if the asset or assets call for investment expertise, setting up a Directed Trust -- where financial advice can be involved and the Directed Trustee will need to listen to investment advisors -- may be the right choice.
Where to make a Directed Trust
If you’re thinking about making a Directed Trust or another type of Trust or Will, most likely you’re responsible and you like to be prepared. Most likely you have some assets that you want to see are handled properly. And that’s what Trusts and other Estate Planning documents are for.
If you want to start your Estate Planning, we can help you. Here at Trust & Will, we offer customizable, state-specific Estate Planning documents for every purpose. Our online Estate Planning services let you get your affairs in order at your convenience. Take our quick estate planning quiz to see if you’ve got everything covered or get started today!