What exactly is a trust, and how can it help your family to protect its assets while supporting the next generation? Julie Enloe, of Illinois Bank & Trust, explores this helpful tool.
Have you considered what will happen with your wealth when you’re no longer here? It’s a very real concern for many, and it’s a conversation that’s not always easy to begin. It is, however, essential for many families.
At Illinois Bank & Trust, we can help our clients to distribute their wealth using a trust. If you’re not familiar with the concept of a trust, these are a few of the most common questions we hear.
What is a trust?
A trust is a legal entity in which a fiduciary holds trust assets for the benefit of the beneficiaries. A trust is usually created by a grantor. Beneficiaries can include the grantor, other individuals or charitable organizations.
There are two basic types of trusts: Revocable and Irrevocable. A Revocable Trust can be revoked or changed by the grantor. An Irrevocable Trust cannot be revoked, although it may be possible to make changes.
What is a fiduciary?
A fiduciary is someone who owes a legal and ethical obligation of trust and care to another person. A trust fiduciary owes the following duties to the grantor and beneficiaries:
- Duty to administer the trust solely for the benefit of the beneficiaries and not seek personal gain;
- Duty to treat the beneficiaries impartially, considering the interests of both current and remainder beneficiaries;
- Duty to invest and manage the trust assets prudently;
- Duty to not delegate any acts requiring the use of judgement/discretion;
- Duty to report on the activities of the trust.
In Illinois, a trust may name multiple fiduciaries. In addition to a trustee, there may be an investment advisor, a distribution advisor, or a trust protector. Each of these fiduciaries may focus on a specific area of responsibility, but the basic duties listed must always be present.
Will a trust reduce or eliminate my taxes?
While a trust is often designed to assist with estate tax planning, it will not reduce or eliminate your personal income taxes. Once a trust becomes irrevocable, it generally becomes a taxpayer itself. A trust is taxed at the same rates as an individual taxpayer, but the rate structure is compressed so a trust begins paying the highest tax rate at $12,950 of income (based on 2020 tax tables).
How much does it cost to set up a trust?
The answer to this question varies depending upon the attorney and their level of expertise, the type and terms of the trust you want, and the importance of estate tax planning, among other things. Your attorney should be able to provide an estimate of the cost upfront. If you don’t have an attorney, make this question part of your interview process.
Who should I name as trustee?
You may have family members who would be happy to serve as trustee and would do a great job. You may want or need someone with specific expertise based on the type of assets that will be held or the type of trust itself. Or, it may be important to have an independent trustee who can mediate disagreements so that your family can still gather around the Thanksgiving table. There are benefits to choosing people who know your family or personal situation. There are also benefits to naming professionals with knowledge and years of experience. Your attorney, CPA or other trusted advisor may be able to guide you.
A trust is not appropriate for every situation. It will depend on your family, the property you own, your beneficiaries and other factors. Even if you don’t need a trust today, you may need one tomorrow. People change. Families change. Financial circumstances change. Whether you need a trust or not, it’s still a good idea to talk with an estate planning attorney. A will, Power of Attorney for Finances, and Power of Attorney for Health Care are basic documents we should all have.
Julie Enloe is a wealth advisor with Illinois Bank & Trust, located in Rockford; Machesney Park, Ill.; Galena, Ill.; Elizabeth, Ill.; and Stockton, Ill.