How Many Trusts Do I Need?

This article is original content written by Thomas Scanlon, CPA, CFP® of Manchester, CT.

grandfather, grandsons and notebook

Estate Planning can get tricky. One tool that is frequently used is a trust. Many trusts are set up as revocable (“rev”) trusts.  This means the person that formed the trust can amend or change it at time during their lifetime. When someone with a revocable trust passes away, the trust then becomes irrevocable, which means it can no longer be changed. The person setting up the trust is known as the grantor or settlor. They will usually become the trustee and the primary beneficiary. A successor trustee should also be named and would become the trustee upon the grantors death. Additionally if the grantor became disabled or incompetent, the successor could step in and manage the trust.

Trust Overview

Many people will set up trusts because, well, they don’t trust someone.  Just kidding (sort of).  A parent may feel their adult children would not be able to hand a large inheritance all at once. For example a parent may have two children ages 24 and 26.  They may feel that if they inherited a significant amount of money it may be spent quickly.  So they set up a separate trust for each of them that might say that the children are entitled to the income annually. Additionally they will be paid one-third of the principal when they turn age 30.  The second third will be paid out at age 35 and the remaining at age 40.  These are strictly an example.  The person forming the trust can do what they feel is appropriate for them.


One Alternative

Instead of setting up separate trusts for each of their children the parent might have considered an alternative.  Set up one trust for both of the children. This would have reduced the administration from two trusts to one trust.  This would also have reduced the number of tax returns that need to be filed from two to one. Essentially this would make it much easier for the trustee to administer and would have reduced the expenses of the trusts.

Naturally there are trade-offs.  With one trust (“single pot trust”) and several beneficiaries of the trust, caution must be exercised when drafting the trust. In our example above the two children were ages 24 and 26, only 2 years apart.  It’s possible you could have a much wider spread in ages.  This might create some challenges as to when to allow principal distributions.

Have you set up separate trusts for each of your children?

We are not rendering legal advice.  Consult your estate planning attorney to determine what’s appropriate for you.

Photo from Free Stock Photos

Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has  recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.

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