You want your hard-earned money to fulfill your short-term financial goals and to provide a comfortable future for you and your loves ones. A trust is one type of estate planning tool that may help you manage your assets and even provide estate tax savings down the road.

Wise investors understand the need for counsel when it comes to making these decisions. At Spectrum Financial Services, we can help give you a better understanding of trusts and how they can help you manage your finances, offer protection over your assets, and give you peace of mind over how and when your assets are passed on to heirs.

What is a trust?
In simple terms, a trust is a legal arrangement whereby control over property is transferred to a person or organization (the trustee) for the benefit of someone else (the beneficiary).

Do you need a trust?
It is a myth that trusts are only for wealthy investors. While it is true that estate tax savings can be a primary reason for establishing a trust, many smaller investors create trusts for protection of their assets, for establishing charitable gifts or for simplifying their finances.

All trusts share the following basic elements:

1. Someone must create the trust. This person is called the “grantor.”
2. Another person must agree to hold money and/or property for the benefit of someone else. This person, persons or corporate entity (i.e., bank) is the “trustee.”
3. Money and/or property must be held by the trustee for the benefit of someone else. This money or property is called the “principal.”
4. A person or organization must benefit from the trust. The “beneficiary” of the trust is the entity that receives the benefits.

What are the different types of trusts?
While there are many different types of trusts available, all trusts fall into one or more of the following categories: irrevocable or revocable, and living or testamentary.

Living Trust - A trust that is established during the grantor’s lifetime is known as a living trust. It will be either revocable or irrevocable.

Revocable Trust - Allows you to maintain control of how your assets will be managed and who will receive them.

Irrevocable Trust - The grantor decides to give up the right to revoke or amend the trust in the future.

Testamentary Trust – A trust that is established after the grantor’s death.

We create trusts all the time in our daily lives without much thought. Take a look at these simple examples below.

Trust Example 1:
You are leaving on an extended business trip and want to give your son $500 to help with living expenses while you are away. Instead of writing a check or leaving cash in your son’s hands to spend as he pleases, you could give the money to a family member or friend. You would then write down specific instructions concerning how the money should be used to benefit your son while you are away. For example, you could note that the money can be used to help pay for gas, food, or activities. You probably wouldn’t want your son to use it on video games or movie rentals.

By entrusting the money to a third party instead of giving the money directly to your son, you have established a trust for your son’s benefit. You are the grantor, because you gave the money to your family member or neighbor. The family member or friend is the trustee because he or she is the one responsible to manage and distribute the money for your son’s benefit while you are away. Your son is the beneficiary because he receives the benefits of the money that is held in trust. The $500 you provided up front is known as the principal. The benefit of this trust agreement for you is that you set the guidelines and restrictions on use of the money (not your son and not your family member/friend).

Trust Example 2:
Another very simple example is when you (grantor) give money to a child care provider (trustee) in case he or she needs something for the kids while you are away. The caregiver agrees to hold money (principal) for the benefit of you and your children (beneficiaries). You trust the caregiver to hold on to the money and use it for the benefit of your kids. And, there is an implied understanding that whatever money the child care provider didn’t spend on the kids would be returned to you.

Managing Taxes with Trusts
While trusts can help you achieve control of your assets, they may also serve another important function: estate tax savings.

If you don’t want your hard-earned wealth to land in the hands of the government, establishing a trust may help ease the estate tax burden your heirs could face (for 2011, these taxes could claim as much as 35% of an estate). By transferring your assets to one or more irrevocable trusts during your lifetime, you may be able to remove them from your taxable estate, which shields them from estate taxes and allows you to preserve more money for your heirs.

Managing estate taxes is just one of the tax advantages trusts can provide. You may also be able to reduce or sometimes avoid capital gains taxes, gift taxes or even income taxes, depending on the type of trust you use. Unfortunately, placing assets in a trust does not free you from paying all taxes.

Important tax considerations related to trusts:
• The trust and trust beneficiaries are considered separate entities and may incur
separate taxes.
• Just like an individual or business, a trust may pay taxes on the income it generates
and retains each year unless this income is passed to the beneficiary of the trust.
• A revocable trust is subject to the same tax brackets as individuals.
• Trusts incur capital gains taxes when assets held in the trust are sold; however, these
gains are taxed at the same rates that apply to individuals (a maximum rate of 15
percent as long as the assets have been held for more than 12 months).
• Distributions that trust beneficiaries receive from a trust may be taxable, but this does
not mean the income is subject to double taxation. The trust will actually receive a
deduction for any income distributed to beneficiaries.

Article Keywords: Trusts, Estate Planning, Estate Tax, Beneficiaries

Allow Spectrum Financial Services to be a part of your TRUST team
Establishing a trust can relieve the anxiety you may experience when considering what would happen to your family and other important people in your life should you become incapacitated or in the case of untimely death. Planning ahead and making tough decisions now will make things easier down the road for you and your loved ones.

If you have questions about this article, or if you want to learn more about how Spectrum Financial Services can assist you in adding a trust into your investment mix, call us at (515) 255-3306, or send us an email via the link on this website.

Specializing in retirement planning, wealth management and investment advice, Spectrum Financial Services is an experienced group of financial advisors who is here to help you achieve your financial goals.

Spectrum Financial Services is not engaged in rendering legal or tax advice. Individuals should consult with their own legal or tax advisor concerning their specific situation.

Securities and advisory services offered through VSR Financial Services, Inc., a registered investment adviser and member FINRA / SIPC. Spectrum Financial Services is independent of VSR Financial Services, Inc.