Prudential Financial

Purpose of Trusts

Creating a separate entity to facilitate the transfer of property

What Is a Trust?

A "trust" is a legal agreement you (the grantor) set up to facilitate the transfer of property to a manager (a trustee) for the benefit of your heirs (beneficiaries). A living trust is created while you're alive. A testamentary trust is created after death.

Because a trust reflects your wishes and desires for the management and/or disbursement of your assets in the event of your death or incapacity, a trust agreement is a very personal, very carefully crafted document. You may design a revocable living trust that allows you to change your beneficiaries and who manages your assets up until the time of your death. Or you can develop an irrevocable trust that cannot be modified, adjusted, or terminated once established.

A trust, because it has a separate financial existence, generally receives a federal ID number and its own bank account.

Who Needs a Trust?
The following questions can help you determine if you need a trust:
  • Do you have an estate, including investments, property, physical possessions, and cash, that could be worth more than $1,000,000?
  • Do you want to avoid probate?
  • Do you have specific desires or goals for the management and disbursements of your assets?
  • Do you plan to leave an inheritance to children from a prior marriage?
  • Do you have a child with a handicap or a relative with a disability who requires additional care?
If you answered "yes" to any of these questions, creating a trust may be a wise decision.

You also might want to consider establishing a trust if your:
  • Assets recently increased in value
  • Financial objectives have changed (e.g., early retirement, nearing retirement)
  • Marital status has changed (e.g., marriage, divorce)
  • Children from a previous relationship must be provided for
  • Residency status has changed (e.g., moved to a new state)
  • Estate includes property in two or more states
  • Executor has died or become incapacitated, or your relationship with him or her has changed
  • Estate has been affected by tax law changes
The Benefits of a Trust
With a thorough, well-crafted trust as part of your estate plan, you:
  • Ensure your assets continue to be managed as you wish after your death. Through a trust, you can control how, when, and under what circumstances your assets are used and distributed. If you have young children, you can avoid legal guardianship for minors who inherit assets.
  • Minimize taxes. You may believe that, unless you're leaving millions of dollars to your beneficiaries and/or a charity, you don't have enough wealth to worry about a trust. In fact, it is likely that you do. Even with estate tax limits rising over the next several years, your beneficiaries could forfeit a big part of their inheritances to estate taxes if you don't take steps now to limit their exposure.
  • Avoid the costs and delays of probate. Assets placed in a trust are transferred according to the trust's terms, bypassing the probate process. With a trust, you spare your beneficiaries legal and/or executor fees (which can total 5% or more of your estate's gross value) and ensure funds are available for your beneficiaries' living expenses while the estate is being settled.
  • Provide financial confidentiality. Wills are public documents. Anyone interested in finding out the value of your estate, including assets and debts, can do so while your will is in probate. Because a trust is a private arrangement not subject to public scrutiny, you can shield your estate finances from public view.
  • Manage and protect your assets in the event of your incapacity. As health care advances make it possible to extend lives, it's vital that you provide for the possibility of being incapacitated and thus unable to manage your own affairs in the case of illness or disability. Through a trust, you can arrange for your assets to be professionally managed by a trustee to benefit yourself and your family.
Avoiding Probate

Because a trust is recognized as a separate legal entity, distributions are made by a trustee to your named beneficiaries without any involvement from the courts. Thus, the process avoids probate and is completely private. In contrast, a will must be filed after death and validated by a court, with the proceedings open to public scrutiny.

The courts do not have any control over your trust assets and do not tie them up in a lengthy—and often costly and stressful—probate process. The trustee simply distributes assets to your named heirs, but only if those assets have been placed inside the trust.

Establishing a Trust

A trust is usually drafted by an estate attorney in coordination with your accountant. Your wishes, goals, and financial situation are reviewed so that a complete, carefully designed trust is enacted.

Funding a Trust

Once you establish your trust, you can place a wide variety of assets in it, including bank accounts, stocks, bonds, real estate, life insurance, and personal property. To make them a part of the trust, you change the name or title on the assets to the name of the trust.

Although the name of the asset's owner has changed, control of the assets has not. Trust provisions usually provide that you can continue to enjoy the trust's income and assets as long as you're alive. You still own the property and can buy, sell, or give it away. Any income or loss activity is reported on your personal income tax return.

What a Trustee Does

Like an executor in your will, the trustee of your trust is responsible for carrying out your wishes when you're unable to. Your trustee has the fiduciary responsibility to ensure that your bequests are fulfilled exactly as prescribed in your trust document.

For example, a trustee will ensure that children from a previous marriage receive an inheritance, provided specific instructions are included in the trust. The trustee can even facilitate care and protection for relatives or children with disabilities in accordance with your wishes.

Corporate Trustee Services

Often, families use trusts to take advantage of the complex world of tax laws, investments, and insurance that are usually an integral part of most estate plans. This complexity can also place additional stress on family members not familiar with these professional disciplines and the sometimes difficult and objective decisions that must be made.

Be aware of the costs and potential investment restrictions of a corporate trustee. A corporate trustee is held to a fiduciary standard and may not be willing to take the risk that family members may potentially desire.

Be sure to consult with an attorney to determine if establishing a trust is right for your situation.