When it comes to estate planning, perhaps you’ve heard of or considered setting up a trust. If you’re on the fence about it, read below to get a brief description of the ins and outs of setting up a trust.

What is a Trust?

Trusts are flexible vehicles for holding and passing on your assets. They ensure that your fortune is passed on to those who are important to you or perhaps to causes that you hold dear to your heart. In essence, a trust is a legal arrangement where your assets, including your money, is held in an account. Only your chosen trustee(s) will have the authority to administer your money according to your wishes.

Many high net worth individuals opt for setting up a trust because of the many benefits that will be listed below. Amongst these benefits, a reduction in taxes payable on death as well as asset protection rank high for reasons to set up a trust.

Who’s Involved?

In order to set up a trust, you will require three key actors:

  1. Settler. The settler is the individual who creates the trust. He/she does this by transferring their assets into the trust.
  2. Trustee(s). As mentioned above, the trustee(s) are responsible for administering the trust. Therefore, the trustee(s) must manage the allocation of the settler’s assets to the beneficiary/beneficiaries. However, the trustee(s) must account for the provisions and limits to their responsibilities that are set upon them by the trust agreement.
  3. Beneficiary/Beneficiaries. The beneficiary/beneficiaries are those who receive the assets from the trust. In most cases, these individuals are the settler’s family members.

So, Why Should You Consider Setting Up a Trust?

  1. Less taxes.  

Assets in a trust are not subject to after death probate taxes. In addition, a trust allows the settler to divide the tax liability on any income earned from it. It does this by taking advantage of the lower tax rates held by certain beneficiaries who may be in lower tax brackets. Thus, with proper planning and advice you may be able to maximize the benefits that a trust can provide.

In the event that shares of a company are sold, taxes must be paid on the capital gain. However, given that the shares qualify for a capital gain deduction, this deduction can be distributed amongst the beneficiaries. As a result, the tax payable is minimized.

  1. Better planning.

Trusts allow the settler to better plan their transfer of wealth. For example, the trust can be used to do an estate freeze.

  1. Asset protection.

Trusts may help your family protect its assets. For example, if your beneficiaries encounter a lawsuit or bankruptcy that demands the seizure of these assets, a trust will prevent creditors from doing so. 

In addition, the settler can determine to whom the assets should go to and when. Thus, the trustee can either transfer the assets as a lump sum once the beneficiary reaches a certain age or transfer the assets in instalments by following the settler’s prescribed schedule. This is an especially important consideration for high net worth individuals who want to prevent financial abuse or irrational spending by their children. Therefore, the settler can guarantee that their assets are going towards specific purposes such as education, buying a vehicle, or perhaps a home.

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