We’ve all heard those stories: A rich man or woman dies. Their family inherits their wealth. They go on a spending spree, showing an absolute lack of financial maturity. And soon, they are left with nothing—they go broke.

If you have any doubt in mind that your heirs may mishandle their inheritance after your death, an estate planning professional  can help you find solutions, such as setting up a trust or multiple trusts and a time table to prevent inheritance disasters.

What is a trust?

Put simply, a trust is a legal arrangement in which you entrust a third party to handle your estate on behalf of your beneficiaries.

The person who creates the trust (in this case you) is known as the “settlor”, while the person entrusted with the responsibility of controlling the estate is known as the “trustee”.

The trustee can either be an individual, a financial institution or combination of both.

Tax Services – Trust in action

Okay, so let’s take a look at an example of how this setup works.

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Mr. Sugar is a wealthy businessman in Santa Barbara, California. He owns multiple c-store chains, a successful restaurant, equity in a couple of tech startups, and a big mansion in the city. Has two kids who go to high school. He is wise enough to acknowledge the need for protecting his kids financially, in case if something happens to him. So, he is actively working on an estate plan these days. However, he’s worried that his eventual heirs might end up mishandling their inheritance.

Mr. Sugar’s concerns are not completely unfounded either, because his children have a history of making bad financial decisions.

To find a solution to his solution problem, Mr. Sugar consults an estate planning professional, which advises him to establish a trust that would initially grant his kids a fixed percentage of his assets annually. Once his kids are well into their adulthood, the trust would then disburse the remaining assets to them.

Mr. Sugar likes the idea and decides to include it in his estate plan.

What you should keep in mind when establishing a trust

There are a few things you need to keep in mind when setting up a trust:

  • Pick a trustee who you think will be able to do their job responsibly
  • Avoid choosing a trustee from your immediate family as that can sometimes lead to conflict
  • Educate your heirs about the workings of a trust

If you want to learn more about trusts in tax services & estate planning? Feel free to contact us; our Santa Barbara estate planning experts will be happy to help you.