A trust is a legal vehicle for managing financial assets for the benefit of you and/or someone else. The property owner (the grantor or settler) transfers legal ownership to the trust, and a person or institution (the trustee) manages that property for the benefit of the beneficiary. It sounds pretty clear-cut, but it can get complicated.
There are some misconceptions about trusts, which can lead to them being unused or misused. Here are several common misconceptions about trust:
Trusts are used primarily to save on estate taxes. This depends on the type of trust and the size of the estate. A trust may impact estate taxes, but that’s determined by the tax law in effect at the time the grantor dies. The same is true of income taxes.
My estate is too small for a trust. Regardless of the estate size, trusts can be used to manage assets and control their distributions in a private way. This is because they aren’t public like probate court. A trust can contain provisions to manage your assets if you become incapacitated and are no longer capable of doing so yourself.
Trusts limit your flexibility. This is not necessarily true. It is because a revocable trust can remain under your control as trust creator and be modified as you want in your lifetime.
You must designate a friend or relative as trustee. Perhaps. The trustee must manage and distribute trust assets according to the terms of the trust. However, not everyone is up to the task of being a trustee. Designate a successor trustee, in case the primary trustee is unable or unwilling to serve.
A trust will protect you from creditors. Some trusts are specifically designed to protect a grantor from creditors, but not all of them do this. Asset protection can be very complicated and expensive. Therefore, if you need to have these protections, work with an experienced estate planning attorney.
Reference: WMUR (September 14, 2017) “Money Matters: Five misconceptions about trusts”