Should You Set Up a Trust?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Trusts were first used in medieval England, and they have evolved to serve many purposes in modern law.

The essential attribute of a trust is that it divides ownership of property into two pieces. One person, the trustee, holds the legal aspects of ownership and may control and take responsibility for the property. Another person, the beneficiary, holds the sole right to enjoyment of the property.

Perhaps the most popular image associated with trusts is the "trust fund baby," usually portrayed negatively as a spoiled young adult who has always had everything provided without any work or effort on his or her part. Despite this unfortunate image, though, trusts play an essential part in many estate plans. They're often preferable to wills in ensuring the orderly transfer of property at death.

Trusts have the following advantages over wills:

  • Trusts can take effect immediately, and therefore can handle a number of circumstances during your lifetime that wills cannot. For instance, if you are seriously injured, a trustee may take over your finances until you are able to assume responsibility again.
  • Assets that pass through trusts are generally not subject to probate proceedings; unnecessary delay, expense, and publicity can thus be avoided.
  • One can usually change a trust without the formalities required for altering a will.
  • Under certain circumstances, one can use trusts to obtain favorable tax treatment.

Trusts also have some disadvantages:

  • Trusts are often more complicated to draft than a will. A poorly drafted trust can be nearly impossible to execute.
  • To put your assets into a trust, you must make sure you change the legal name on the account to the trust's name. Failing to do so may negate many of the benefits of having the trust.
  • Appointing a guardian is traditionally done in a will. While there may be no legal requirement that a will be used to name a guardian, courts in your jurisdiction may be more comfortable with seeing the appointment in a will.
  • Many professionals charge more in upfront fees to draft a trust.

Unfortunately, it may not always be easy to determine when a trust is better than a will. Only by taking a hard look at all of the factors that affect you and your finances can you make an informed choice about which will help you more. No matter what you decide, remember that understanding your estate plan is essential to making sure that you will achieve your goals.

Before you leave (this Web page or this earth), mark these three things off your eternal "to do" list:

Frustrated with your 401(k)? Even if your employer's plan isn't the greatest, you don't have to give up your dreams of a happy retirement. Get the tips you need to turn your retirement savings around in our special report, "How To Make The Most of Your 401(k)" -- just click here for instant free access.

This article, written by Dan Caplinger, was originally published on June 2, 2006. It has been updated by Dayana Yochim, who is the author of The Motley Fool's Guide to Couples & Cash. The Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 20, 2009, at 8:39 PM, TideGoesOut wrote:

    In terms of this, I was thinking of setting up something sensible in a ridiculously long trust for my 2 year-old daughter...basically putting $1000 in something that she would have difficulty extracting until she was beginning to approach retirement (50? 55? 60?). What's the best current way to do this in a stable and effective way?

  • Report this Comment On November 10, 2011, at 7:32 PM, joeTrusty wrote:

    Wow that is a long ways away, 50 or 55.... Hmm not sure what to say here but this site has helped me in the past Its good to see that you are planning at young age, good luck.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 856954, ~/Articles/ArticleHandler.aspx, 10/27/2016 7:00:50 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 9 hours ago Sponsored by:
DOW 18,199.33 30.06 0.17%
S&P 500 2,139.43 -3.73 -0.17%
NASD 5,250.27 -33.13 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes