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Three questions to ask before funding a trust

Consider these three questions before choosing which assets to use to fund a trust.

Trusts are legal tools that can provide a number of benefits. Depending on the details of your estate plan and your goals, these tools can aid in tax savings and shelter funds from creditors. Once you decide to move forward with a trust, the next step is to determine the best way to fund it. Before moving forward with funding a trust, ask these three questions:

  • What are the tax implications? Trusts are not people. There are a few key differences in how the Internal Revenue Service (IRS) treats trusts compared to the process used to tax individuals. A recent publication in the Journal of Accountancy notes that depending on the details of the trust, income taxes may apply. In most cases, a Form 1041 must be filed. This form is used to report any taxable income, generally composed of ordinary income and capital gain. Essentially, ordinary income is defined as the dividends of the trust plus the interest while capital gains are the funds gained from the sale of any asset.
  • Will I be able to access the assets? A recent article in Marketwatch, a publication by Dow Jones & Co., discussed the importance of considering the usability of an asset. More commonly referred to as liquidity, this term speaks to the ability to access the funds. The first thing to consider when determining the usability of the asset once placed in the trust is the structure of the trust itself. Some trusts are designed to limit access. This design serves many purposes, most notably to offer the asset increased protection from creditors. The next consideration involves the investment strategy used within the trust. Some may require a longer time commitment before the creator can access the funds, others take less time. Get the information and carefully review your needs before deciding how much to put in.
  • How can I fund the trust to meet my future needs? It is also important to take any future needs into consideration. This is particularly true when it comes to planning for long-term health care needs. Funding trusts wisely can help you receive the medical care you need while also preserving wealth for future generations.

It is important to note that both state and federal laws apply and are often changing. As a result, it is wise to contact an experienced trusts attorney before moving forward with creating and funding a trust. This legal professional will review your needs and help devise a plan that helps better ensure your interests are protected.