After a lifetime spent trying to build the wealth necessary to fund a comfortable retirement, worrying about how you’ll use it is natural. You may have even accumulated more assets than you could reasonably spend within your lifetime. One way to deal with that is to establish a personal trust. It’s a separate legal entity that acts as a type of holding company for your assets. A personal trust can have some significant financial advantages. Here are six ways one can help you protect your assets.
1. Formalizes Your Wealth Distribution Plan
When you form a personal trust, you set guidelines that govern the use and disposal of your assets. That may include spending them to cover the needs of relatives. It may also include automatically executing instructions on what to do if you’re incapacitated. A personal trust can also give you peace of mind that your assets will remain responsibly managed if your only heirs are minors or those with special needs.
2. Avoids the Probate Process
Your family will go through probate if you establish a will as your primary means of distributing your assets after your death. That’s the formal legal process that verifies the validity of your will and allows for its execution. Probate can be a costly process, leaving less of your estate for your heirs. If you form a personal trust, it becomes the legal owner of your assets. Since your trust will outlive you, your assets will escape the probate process.
3. Minimizing Estate Taxes
Depending on where you live, your assets could be subject to both Federal and local estate taxes. Your heirs may also pay inheritance taxes based on the assets you leave them. Depending on the type of trust you choose, minimizing or eliminating estate taxes is often possible. This is an advantageous strategy if you’re a high-net-worth individual. Smaller estates may not have significant enough tax liabilities to make a trust worth considering. Consulting a tax attorney can give you valuable insight into your potential tax exposure.
4. Reduces the Chances of a Conflict
Unfortunately, family dynamics often make the administration of an estate a contentious process. That can result in significant conflict, even if you’ve left a will. Your heirs can contest the provisions of your will in court, often leading to massive legal costs in the process. By contrast, the directives that govern a trust are difficult to contest in court. The bar for filing a complaint against a trust is much higher than for a will.
5. Shields Assets From Creditors
There are even certain kinds of trusts that can shield your assets from creditors. Specifically, an asset protection trust includes privacy provisions that make it difficult for creditors to find or lay claim to. You can also use one to change the legal location of your assets, such as moving them to a low- or no-tax state. That can also create roadblocks for creditors in some situations.
6. Prevents Unwise Financial Choices
Unfortunately, getting older carries the risk of suffering from various forms of mental impairment. That can leave you vulnerable to making unwise financial decisions that lead to asset losses. You can form an irrevocable trust that can shield you from that outcome. Those have directives you can’t change without going to court.
