Trust Young Money

Mention a trust, and the first thing most people think of is a spoiled kid living off an inherited fortune without having worked a single day in life. As a result, most people don't know very much about trusts, and they assume there's little need to have even a basic understanding of this useful estate-planning tool.

In many situations, though, trusts can be the best way to achieve your financial goals, especially if they involve making sure that you and your loved ones are taken care of when you're unavailable to do so yourself. Let's take a look at five things that most people don't know about trusts, but that can be very valuable in the right situation.

1. You don't have to be rich to benefit from a trust
The popular perception of trusts involves rich families with high-powered Wall Street institutional advisors acting as trustees managing their money. True, the costs of institutional trustees often make them appropriate only for people of substantial means. Otherwise, the costs can be so high that the potential benefits of the trust aren't worth the expense.

But there's nothing requiring you to choose an institutional trustee for your trust. Indeed, you can ask a family member to act as trustee for no compensation at all, safeguarding your assets according to the trust's terms without having to involve highly paid financial companies. By keeping even modest sums of money protected, trusts can ensure that your wishes for your money will be honored into the future.

2. Trusts can last a ridiculously long time
Trusts used to have limited lifespans. One of the most complex legal rules in this area, the rule against perpetuities, says that a trust must have all of its interests vest within 21 years of the death of the last surviving person when the trust was created. What that complicated provision boils down to is that, at least in the past, trusts couldn't last more than 75 to 100 years or so.

Nest Egg
Source: Wikimedia Commons user Manyman.

Recently, though, the rise of the dynasty trust has led many states to repeal the rule against perpetuities or allow much longer maximum periods. For instance, Wyoming established a 1,000-year maximum term on trusts, while Nevada set a shorter 365-year maximum. But many states, such as South Dakota, have simply allowed trusts to go on perpetually. Concerns about loss of gift- and estate-tax revenue have led some to consider new federal laws to ensure intergenerational exposure to estate-tax laws, but so far those considerations haven't led to any firm action.

3. Trusts let you keep your business private, even after you die
One of the greatest benefits of trusts is that there's no requirement for anyone to make their terms public, even after you die. By contrast, once you file a will with a probate court, it becomes a public document and opens up the provisions of the will to anyone who wants to look at them.

No matter how much or how little money you have, you may not want to share your financial secrets with the public at large. A trust can be the perfect vehicle to allow you to make your express instructions crystal-clear while still keeping outside audiences at bay during one of the toughest times your family will ever experience.

4. There are limits to the demands that trusts can make of beneficiaries
A trust can reflect the wishes of the person who creates the trust, but there are still limits. If a trust provision requires that a beneficiary break the law to receive trust assets, then a court would strike down that condition. In addition, courts routinely invalidate provisions that run counter to public policy considerations.

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Source: 401(k) 2012 via Flickr.

For instance, a Texas court upheld a provision that took away a beneficiary's interest in a deceased person's trust when that beneficiary put the deceased person's wife into a skilled nursing facility. Even though the wife's doctor recommended the move, the deceased person's intent was clear and warranted the beneficiary's removal.

Other provisions that have been upheld include requirements to marry within a certain religion. However, requiring a trust beneficiary to get a divorce, as another example, is typically invalidated. If you expect to put tight controls on your money, it's smart to have a lawyer look over the document to make sure it will actually do what you think it will.

5. Trusts can protect you and your family from creditors
One great aspect of trusts is that they can help you protect your assets from attack from others. In anything from a contentious divorce to a liability lawsuit, certain types of trusts will protect family members by leaving the assets within the trust beyond the reach of litigation or attachment.

Not just any trust will accomplish that purpose, though. A revocable trust that gives you complete flexibility to take distributions for your own needs won't stop creditors from making claims against your assets. But by using trusts to leave money to others, your heirs often will gain creditor protection to the extent that the trust limits their ability to take distributions.

Trusts can be complicated. But used correctly, they can also be a great solution to your estate-planning challenges and help you make sure your family's financial needs are met long after you're gone.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.