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Managing Your Assets With TrustsManaging Your
Assets With Trusts

Estate planning can help ensure that your investments and possessions will be distributed according to your wishes after you pass away. Trusts can play an important role in helping you fulfill that goal, while including provisions for flexibility in case of unforeseen events.

Trusts are legal entities that own assets for the benefit of an individual or individuals and/or an institution, such as a charity. When you create a trust agreement and fund a trust, you are considered its grantor. The person or organization receiving distributions from the trust of assets or income is the beneficiary, while the person or institution managing the trust assets—often you, a financial advisor, an attorney, or a financial institution—is called the trustee. "Trusts are about establishing additional control with respect to how assets in your estate will be distributed," says Christine Fahlund, CFP®, a senior financial planner with T. Rowe Price.

What kind of testamentary trust is often useful in the case of blended families?

More than four in 10 American adults have at least one step-relative in their family, according to a 2011 Pew Research Center survey.

If you are married and part of a blended family, one type of trust to consider is a qualified terminable interest property (QTIP) trust. With a QTIP trust, the surviving spouse has the right to receive income from the trust while he or she is alive. Then, at the second spouse's death, the trust's assets—after payment of any estate taxes that may be due at that spouse's death—are made to the beneficiaries designated in the trust. A QTIP trust may be especially useful when you have remarried and the intended beneficiaries after your spouse's death are the children from a prior marriage.

Upon the death of the surviving spouse, the remaining assets in the trust are included in the taxable estate of your spouse and are distributed to your ultimate beneficiaries—children from a previous marriage, for example—according to your stipulations.

QTIP trusts can sometimes provide challenges for the beneficiaries, however, so it is important to consider all potential consequences to heirs before making a final decision. For example, if the surviving spouse lives for a very long time, it may be many years before the children receive any of their inheritance. An alternative approach might be to have the assets in the estate allocated to heirs and immediately distributed to them outright, according to the terms of the will or living trust. In addition, sometimes QTIP trusts can be a challenge to manage, since the trustee must balance the interests of all the beneficiaries when making investment decisions, and sometimes the beneficiaries do not agree on the choices made.

Trusts have many advantages—they can often remain private, establish guidelines for a minor's inheritance, and create incentives for heirs to accomplish goals. Wills become a matter of public record after you pass away, but, in many states, certain trusts do not.

With some exceptions, your attorney can write "spendthrift" or "support" clauses into a trust. A spendthrift clause prevents beneficiaries from spending an inheritance irresponsibly and also may be able to protect a beneficiary's inheritance from creditors; a support clause contains a provision allowing the trustee to pay income and principal to the beneficiary for his or her support and education, but not for enabling a new, "extravagant" lifestyle.

Testamentary trusts and living trusts are two main types.

A testamentary trust is one that doesn't take effect until after you die. It sets out how the assets that are used to fund the trust at your death should be managed and distributed. This type of trust can be especially useful for managing assets left to minors and for controlling distributions of assets in complex family situations. For example, a couple with minor or young adult children could specify in their wills that a trust be created for the children if both parents pass away. The trust could then specify how the money should be used for each child and at what age(s) or for what purpose(s) the child may inherit the assets directly.

A living trust is created and often funded during your lifetime. When properly drafted and executed, assets in a living trust at the time of death can avoid probate because the trust—not the deceased—owns the assets and only property in the deceased's name has to go through probate.

Living trusts can be revocable or irrevocable. Revocable trusts have more flexibility and can be changed or dissolved any time before you die or become incompetent.

Many investors today own property in states other than their state of legal residence. Some actually deed the property to a trust with the intention of avoiding probate. It may or may not be appropriate for your situation, but it is something to discuss with your estate attorney. Assets held in a revocable trust generally are included in your taxable estate. You may serve as your own trustee, or select an institution or another individual to serve in this capacity.

While you may not be able to predict many of life's events, you can control how your assets are managed and distributed after your death. Using trusts in your estate plan can ensure that your intentions are respected and your heirs are protected according to your wishes. With help from an experienced estate planning attorney, you can craft an estate plan that most appropriately provides for your loved ones under a variety of circumstances.

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