Mega Mansion Trust

A Primer On Estate Planning Using Trusts

in Financial Planning by

When it comes to estate planning, most people associate trusts with the ultra-wealthy, such as those who are able to afford the mansion pictured in this post. In reality, trusts can be a great tool for a large number of people who want a tax savvy means of passing their estate onto their heirs.

What Is A Trust?

A trust is a legal entity you set up to hold, safeguard, distribute and control all your assets. There are several players who are involved in creating and administering a trust –

  • Trustor (can also be referred to as grantor or settlor) – The person who sets up the trust.
  • Trustee – Person(s) or entity that manages the trust’s assets.
  • Beneficiary – Person(s) or entity that gets the assets in the trust.
  • Successor trustee & beneficiary –In some situations the trustor, trustee, and beneficiary are all the same person. For example, if you have a middle class networth, you might want the benefits of the trust but do not want to pay someone else to manage your trust; especially if you are already doing all the management as the owner of the said properties. In such cases, the person creating the trust will take all the roles and appoints a successor trustee and successor beneficiary.  The successor trustee takes over if and when the original trustee dies or declines to serve.  The successor beneficiary, as you might imagine, benefits from the trust.

These players work with the following building blocks to set up a trust –

  • Property – The assets you place into the trust
  • Objective of the trust – There are different types of trusts tailored to meet a variety of estate planning objectives.
  • Rules/ Provisions – Clauses in the trust that describe what is to be done with the assets under trust.

For the trust to work best and carry out your intentions, you decide what type of trust will suit your objectives, follow all the rules for that type of trust and make sure all the legal requirements continue to be met over time.

Benefits Of A Trust

There are many reasons to set up a trust, the common benefits include –

  • Avoiding/reducing taxes – Avoiding or reducing estate & gift taxes is probably the most popular reason why people set up a trust. For the year 2014, $5.34 million of your estate will be excluded from taxation upon your death. For couples who are legally married, the federal exemption of $5.34 million may pass directly from the first-to-die to the surviving spouse, thus providing a federal exemption upon the second spouse’s death that will increase from $5.34 million to $10.68 million. 
  • Avoid probate – If you have a will, the assets included in your will must pass through the state’s probate process. The probate process is time consuming and depending on the state, it can cost anywhere from 4 to 10 percent of the value of the estate. A trust on the other hand can directly and quickly pass the assets to the beneficiaries.
  • Protecting the estate – A properly constructed trust can protect the assets from the beneficiaries’ creditors and lawsuits.
  • Control of your estate – When setting up the trust you can dictate how and when you want the estate to be used.
  • Provide support for minor children or dependents with special needs.
  • Donate to charities in a tax efficient manner.
  • Privacy – Terms of a will and the details of the assets left in the will are usually public while the terms of a trust are not.

The Different Types Of Trusts

There are many different varieties of trusts – some will serve a single purpose, others multiple, some are set up to function while you are alive, while others work only after you die, some can be changed, while others are irrevocable. Even though there are more varieties of trusts than there are days in a year, they can be classified into four basic kinds –

  • Revocable trust, this type of trust can be altered, amended or revoked by the settlor at any time.
  • Irrevocable trust, in contrast to the revocable trust, cannot be altered once it is created.
  • Inter vivos trust, also called a living trust, is created while the settlor is still living.
  • Testamentary trust, also called a will trust, this trust is created at or following the death of the settlor based on the individual’s will.

Depending on the purpose of the trust, it can be further classified into many different types. Some of the common types include:

  • Marital trust (or “A” trust): Provides benefits for the surviving spouse and the married couple’s heirs. A marital trust goes into effect when the first spouse dies.
  • Bypass trust (or “B” trust): Created along with the “A” trust, maximizes the use of the decedent’s estate tax exclusion amount to lower taxes.
  • Generation skipping trust: Lets your children use the assets, keeps them out of the estate to avoid paying estate taxes and ultimately passes the assets to the grandchildren.
  • Special needs trust: Allows a person with special needs, to receive income without negatively affecting their ability to qualify for public assistance such as Social Security Income and Medicare.
  • Charitable lead trust: Is designed to reduce the taxable income of the beneficiaries by donating the income of the trust to a charity and after a specific period of time, transferring the assets to the beneficiaries.
  • Charitable remainder trust: Works the other way; the trust pays the beneficiaries for a specific period of time and then transfers the remainder of the trust to a charity.
  • Spendthrift trust: Protects the assets from irresponsible beneficiaries and their creditors.

There are now trust laws that will even let you create a trust to take care of your pet after you pass away.

The Cost Of A Trust

There are a variety of costs associated with setting up and administering a trust.

  • Set up fees – This includes attorney fees for drafting the required documents, a will and any durable powers of attorney. The cost can be anywhere from $1,600 to $3,000 or more depending on the complexity of the trust and the size of the assets.
  • Maintenance fee – If you are appointing a bank or a trust company as the trustee, they will charge an annual administrative maintenance fee. This can range anywhere from $2,000 to $20,000 annually, depending on the value of the trust and the effort involved in maintaining the assets in the trust. For example, if all the trustee has to do is file the taxes for the trust, the fee will be lot less than a trust that requires investment and real estate management. Most middle class trusts are maintainted by the truster themselves just like they were doing before creating the trust. The only difference is the now the properties will be in the trust name as opposed to the truster’s name.
  • Re-titling of the assets – After you set up the trust, the assets have to be transferred and re-titled to the trust’s name. The cost of this will vary based on the type and value of the asset and the state you live in. For example, State of Colorado charges 0.01 percent as the transfer tax (the tax you will pay when you transfer the property from your name to the trust) whereas if you live in the State of Delaware you will have to shell out 2 percent of the value of your home to transfer.

It is possible to do most of the process yourself to save on costs, but given the complex laws surrounding estate planning, a small mistake could cost you or your heirs a lot more than you saved. It is better to get it right the first time. Before you resign to forking over thousands of dollars, there are things you can do to save money, especially if you are paying your attorney an hourly rate.

Before you set up the initial meeting, prepare a file with the following:

  • Why are you thinking of setting up a trust? What are your objectives?
  • List of all the assets you own and want the trust to hold
  • Who will inherit your properties and on what conditions?
  • Proof of ownership, deed and other title documents for the assets
  • Recent appraisal documents, if applicable.

How To Set Up A Trust

You will meet with your estate planning attorney and discuss, based on your objectives, whether setting up a trust is the right thing for you. You will also decide on:

  • The specific type of trust you want to create
  • Who will serve as the trustee
  • Who will be the beneficiaries

Once those decisions are made, it is pretty straight forward – your attorney will draft the trust agreement, a will and the required powers of attorney.  Once set up, your trust will have its own Federal Tax Identification Number. The final step will be to transfer the assets from your name to the trust.

The Rules Of A Trust

The rules that govern a trust depend on the type of trust and are spelled out in the trust agreement. In general, a trust agreement may contain:

  • Name of the trust
  • Purpose of the trust
  • Name of the trustee, successor trustee, beneficiaries and granter
  • How the property has to be controlled and by whom
  • The powers and duties of the trustees
  • How the property will be distributed
  • General trust provisions (depending on the type of the trust)
  • How the trust rules may be altered

Once a trust is set up, it takes its own identity. Every year the trust has to file taxes. Trusts (except living trusts for which the income and deductions reported in the personal income tax return) need to file Form 1041 (U.S. Income Tax Return for Estates and Trusts). The trustee has to prepare Schedule K-1 forms for each of the trust’s beneficiaries. This Schedule K-1 will have to be included in each of the beneficiaries own personal tax return.

Is Your Estate “Trust” Worthy?

Trusts can be helpful for families of all sizes and incomes, but creating and administering a trust is a complex, time consuming and a relatively expensive process. Would you want to spend $3,000 setting up the trust and another $2,000 a year in maintenance fees if your entire net worth is less than $250,000? Probably not, but what if you are caring for a child with special needs, have minor children or you want to leave your assets for a specific purpose, like the education of your descendants? In those cases, it might make sense to set up a trust even with a lower net worth. (note: the average net worth for a Personal Capital user is roughly $770,000)

Deciding whether to set up a trust, what type of trust to set up and what provisions to include depend on your individual circumstances and goals. Speak to a loved one in depth about the objectives you’d like to create for your money. Then consult a qualified attorney and talk it over before spending a lot of money and time.

A trust set up in the right way can give you a greater amount of control over your wealth, as well as protect your legacy.

Readers, have you ever set up a trust? If so, for what purpose? If you have a trust fund, do you think it has negatively affected your motivation to create your own wealth?

Photo credit: Tpsdave pixabay.

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Suba Iyer
Suba Iyer is a blogger by trade and a personal finance geek at heart. After living from paycheck to paycheck in spite of her above average income, she figured money is not just about math. It involves human psychology, application of knowledge to individual situations and having all the right information. She now dedicates her time to writing about intelligently leveraging knowledge, time and money.


  1. Financial Samurai

    Great comprehensive post Suba. So many moving parts that this is a must read for anybody who is looking to set up a trust.

    The trust setup fee of $3,000 and $2,000+/a year to maintain is definitely not cheap. I have to imagine that someone would have to have a net worth of over $500,000 to start making a trust worthwhile since that’s over 1% leakage a year.

    Can a very clear cut will simply avoid probate and make one’s wishes known? I guess there is the tax issue, but so long as you are under $5/$10 million, there is no taxes if you pass them down correct? I guess that doesn’t solve the living trust situation.


    • Suba @ Wealth Informatics

      I don’t think a will can avoid probate, how much ever simple it is. I wouldn’t worry about the ongoing maintenance cost as most middle class folks will maintain the estate themselves so the leakage (even for lower net worth) is probably negligible. The main concern would be the start up cost. Given the advantage of avoiding probate, more control and other tax benefits, it might definitely be worth an expense for a lot of people.

  2. Jim

    Great overview, I’ve been considering if I need to do something like this. It’s amazing how many people in my neighborhood seem to have their houses in trusts it made me wonder if I was missing something.

    • Suba @ Wealth Informatics

      @Jim, we are in the process of creating (and transferring the house as part of it) an estate too. We are nowhere near high networth family. Our motivation came from providing for our minor child and the way we want our assets to split between charity and our daughter.

  3. Barbara Rose

    I really appreciated this well written article Suba! It is timely information for me as the issue of a trust came up at a recent family reunion. Now after reading this article, I am rethinking my original assumption that our family (10 children) should be pursuing a trust for my living Mother’s assets ($250,000 invested in bonds). The costs of maintaining the trust would be a bit high for our minimal funds. We want to retain the balance, instead of distributing 10 ways, to fund more fantastic family reunions every couple of years. Thanks for helping us to see this might not be the best thing! It will save time (and money!) when the lawyer begins the spiel educating me about trusts.

  4. John Har

    Suba, can you expand on what the maintenance costs are? You mention $2,000 a year, but when I watched some relatives maintain their trust on their own, there weren’t any visible maintenance costs except the cost of the annual tax return for the trust.

  5. John Har

    Suba, you are correct that a will by itself cannot avoid probate. It just guarantees how the estate will be divided, after probate. It’s the trust that protects the estate from the probate process and fees. (The probate process will lock up the decedent’s assets for some time, on the order of 1-2 months I believe, before the inheritors can access the assets.)


    Blended families have some unique situations, in dealing with children./ What kind of a trust works best for making sure life insurance $ is accessible to the children and not to the step parent.


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