You Should Consider Setting up a Trust Fund—Even if You’re Not a Millionaire

Do you hear the words “trust fund” and instantly think of a privileged kid who never has to work a day in their life? Or, maybe you think of specific celebrity heirs who became wildly famous for having a lot of money. Let’s face it, for most us, much of what we think we know about trust funds largely comes from the media, and it often leaves a bitter taste in our mouths. But there’s value in talking about trust funds, and how they work, in less extreme cases.

While it’s nearly impossible to know how many Americans have a trust fund at any given moment, according to an April 2022 report, 67 percent of Americans have no estate plan at all. That means neither a will nor a trust. Historical data on inheritances suggests that back in 2010 only 21 percent of American households transferred wealth—presumably from one generation to the next.

Furthermore, data shows that not all millionaires got their money from a rich relative. “While 1 in 5 millionaires—21 percent—received some inheritance, only 3 percent received an inheritance of $1 million or more,” according to a 2022 Ramsey Solutions study. This means the majority—79 percent—of today’s millionaires became millionaires without receiving any inheritance at all from their parents or other family members.

On the flip side, you don’t have to be a millionaire to want to leave your kids or favorite charities something of value—cash, investments, homes, jewelry, and more. Doing that is more complicated than just writing down a list of assets and leaving it under your pillow. If that document were legally attested, it would be a will. But wills still need to be reviewed in probate court and those transfers could be heavily taxed. In fact, avoiding probate court is one of the major benefits of a trust fund. Here’s everything you need to know about trust funds and five reasons why you should consider opening one.

What are trust funds?

“A trust is an entity that you can fund with assets, like real estate, bank accounts, brokerage funds, life insurance, etc.,” explains Candace Dellacona, a trust and estates attorney in New York City.

Many people put their assets in a trust to make the process of distributing them easier. Trusts also help minimize tax liabilities and keep ownership of high-value assets private.

Who does what?

A trust involves three major players, and each one has an important role.

Grantor

A grantor is the person who turns over their assets to the trust. This person relinquishes ownership over specific assets placed into the trust and lets a trustee control them. While the grantor can decide to turn over full ownership immediately, most name a successor trustee—someone who will take ownership only if the grantor passes away or is incapacitated.

Trustee

The trustee is in charge of the trust. The trustee makes decisions, especially when the grantor passes away. The grantor can operate as the trustee while alive and name a successor trustee to take over if or when incapacitated or passed away. Based on rules established by the grantor, the trustee may have certain stipulations about how they can manage the assets.

Beneficiaries

The beneficiaries are the people who receive the assets in the trust when the named occurrence happens, typically when the grantor passes away. Beneficiaries can be individuals or charities.

The trustee must follow all the directions placed in the trust, file proper taxes, and report any changes to the beneficiaries.

Types of Trusts

The two main types of trusts are revocable and irrevocable.

Revocable trusts are the most common and they’re more flexible than irrevocable trusts. A revocable trust can be changed throughout the life of the trust. A grantor can change the assets in the trust, the beneficiaries, and much more.

On the other hand, an irrevocable trust is much more rigid. Once assets are placed in an irrevocable trust, the trust can’t be modified without the beneficiaries’ consent. For tax purposes, an irrevocable trust has its own employer ID number, because, once created, it can’t be associated with the social security number or individual taxpayer identification number of the person who created it.

5 Reasons You Might Want a Trust Fund, Even if You’re Not Rich

1. You want every dime of what you’ve got to go to the people you love.

Assets that aren’t in a trust fund tend to go before a probate court in your state of residence. Not only does this process cost money for your beneficiaries, but any disagreement could mean that the government retains assets meant to go to your loved ones. When you don’t have much to pass on, every dollar used toward the legal process diminishes how much your heirs—whether a loved one or a charity—will ultimately receive.

“If you go through probate, creditors will take the first bite of anything you plan to leave your children or grandchildren, and you risk fighting between family members in court, as well,” says Sara Ovando, a partner at Ovando and Bowen in California. Trusts ensure that everything you have—no matter how big or small—gets to the people you name as inheritors.

2. You want to provide for a beneficiary with disabilities.

“Trusts are also commonly established when a parent has a disabled child,” says Dellacona. If you have children or grandchildren with disabilities that you want financially cared for upon your passing, you can state the parameters in your trust. Receiving money in a trust will also ensure that these individuals are still eligible for social security benefits, including Old-Age, Survivors, and Disability Insurance. It also ensures that they do not lose income-based benefits like subsidized housing and health insurance, just for receiving a windfall.

3. You want to guarantee money goes to your children if something happens to you.

It is a terrible thing to pre-decease your children before they become adults. The very thought haunts many of us. Parents typically get life insurance to protect against this possibility, but trusts also help. When a trust is set up, a grantor can stipulate that beneficiaries who are minors today will receive their inheritance when they come of age. Because a trustee must execute the trust as stipulated, it can also entail having the trust fund their education, needs, or talents even before the minor takes over full ownership.

4. You want your family to be able to grieve in peace.

Probate court is the last thing a grieving person needs to endure. Rather than having peace while grieving, loved ones will be looking through paperwork, trucking back and forth to court, and trying to remember conversations about what the deceased intended. And probate isn’t optional. Each state determines the estate limits. “In California, for example, probate will occur with anyone who passes away and has assets totaling $184,500; there is a simplified probate for smaller estates,” says Ovando. “But when you have a trust and it’s properly funded, your estate can avoid having to go through probate.”

If your family is blended—consisting of children from different relationships or multiple spouses—probate court often opens old wounds that a trust can let rest in peace.

5. You want the tax benefits.

As mentioned previously, Ovando explains that an irrevocable trust is a legal entity that will have its own employer ID number to report taxes. Assets in an irrevocable trust also are not subject to estate taxes. Because the assets are no longer in an individual’s name, the grantor does not pay income taxes on the trust’s earnings when they are alive. This means that you can lower your taxable income during your lifetime.

Even better, beneficiaries don’t pay estate taxes they inherit from a trust. This means a lot to an inheritor who relies on income-based services. Even a small amount of money received could drastically change their benefits. You’d hate to have them pay more in taxes and benefit losses than the inheritance is actually worth.

A Certificate of Deposit (CD) Can Be a Smart Financial Move Right Now—Here’s Why

“Save early and often” is common financial advice and it provides a pretty solid baseline for a healthy financial future. However, saving with a specific strategy—including a plan to earn on those savings—can be especially beneficial. If you don’t want to just save passively and are looking to get a high return on your savings, a certificate of deposit is worth considering.

A certificate of deposit (CD) is a type of savings account with a fixed interest rate and fixed time period. CDs typically have higher interest rates than other savings accounts—meaning you can get more out of what you put in—but they often require you to lock money in for a set period of time (often between three months and five years) and have an early withdrawal penalty. Depending on your individual goals and needs, CDs can be a great way to optimize your savings, or you may be better off opting for another option.

Keep reading to learn more about CDs, what they look like in the current financial climate, and how to know if they’re the right choice for you.

The benefits of CDs right now

Federal Reserve officials have raised the federal funds rate several times this year, and while that can increase the cost to borrow funds, it can also produce a higher yield when you save. “Returns on CDs are moving in the right direction for savers, with the Federal Reserve boosting interest rates aggressively in an effort to bring inflation down,” Greg McBride, chief financial analyst with Bankrate.com says. “The outlook for the next 12 months—higher returns and hopefully tamer inflation—is considerably better than what CD investors have endured over the past three years when interest rates fell to record lows and then inflation soared to 40-year highs.”

According to Nerdwallet, CD rates are currently some of the highest that they have been in a decade, making right now an optimal time to open one.

CDs also become more attractive during times of uncertainty because they are viewed as a much safer form of investment compared to stocks and bonds where you might lose a portion of your principal. This is because CDs are insured by the FDIC up to the $250,000 legal limit, meaning that even if your bank goes under, you’ll still get your money back.

The cons of CDs

The term of CDs can vary from 30 days to five years, and for that time period, your funds are essentially in a lock box—of which you don’t have the key. “It is important that an investor understands that once they invest in a CD, those funds are tied up until maturity,” cautions Darleen Gillespie, chief retail banking officer at First Bank. “In cases where someone must access those funds [before the term ends], they run the risk of incurring a penalty to withdraw. This can erode any interest they may have earned. In some cases, a bank can also dip into the original amount you put in, if needed, to cover a penalty.

Before you lock up your money in a CD, be sure you understand the fixed terms, penalties for breaking CDs, and other fees associated with an early withdraw.

It’s also important not to put all your eggs in one basket, savings-wise. Since the funds in your CD typically aren’t accessible without penalty, it’s important to have an emergency fund or other account that you can pull from in the case of an unexpected job loss, sudden medical bill, or other large expense.

Types of CDs

James Morgan, vice president of savings and forecasting at Consumer Bank at Capital One, says you can select different CDs for different strategies and purposes. One option, he explains, is a no-penalty CD, or liquid CD, which allows you to take out your cash before the term is up without an early withdrawal penalty.

For instance, Morgan says if you put $5,000 in a three-year liquid CD, but you need $1,000 after a year, you may be able to take that amount out of it without a penalty. “Some liquid CDs have limits on how much you can take out without a penalty,” continues Morgan. The downside, though, is “they may also offer lower rates than other CDs that don’t offer the option to access your funds early,” he adds.

Other CD options include a high-yield CD, which has higher-than-average rates, a jumbo CD, which has a high minimum deposit (typically at least $100,000) in exchange for a higher interest rate, an IRA CD, which is held in a tax-advantaged individual retirement account, and more.

So, before deciding what term to get, examine all of the available options and think through your savings goals so you can choose the right CD for you.

How to Use the New Student Loan Plan to Improve Your Financial Picture

About 43 million Americans are saddled with student loan debt. And with compounding interest and low, income-based payments, many of them have found themselves paying thousands more than their original student loan amount, yet making little headway at paying off the original loan.

Since the beginning of the pandemic, the government has put a freeze on student loan payments and charging additional interest on student loan balances, which has helped many people stabilize their finances a bit. But this week’s announcement of a new student loan plan could help many of those families get a big step closer to a more stable financial picture.

“This is a huge first step,” says Stefanie O’Connell Rodriguez, host of Real Simple’s Money Confidential podcast. “This enables money for a down payment on the house, it enables people to take risks, start businesses, have families.” And it could be a big step forward for you, if you are currently in the process of paying off federal student loans.

 

New student loan rules 101

The student loan plan is still taking shape and may be subject to some changes over the next few months, but here’s what was proposed this week. Keep in mind that these only apply to federal student loans—private loans are not subject to these new rules.

 

Forgive up to $20,000 in student loans

The big headlines have been all about the student loan forgiveness—$10,000 of federal student loan debt for people who make less than $125,000 as a single tax filer, and $250,000 as a couple. The loan forgiveness amount increases to $20,000 if you were eligible for Pell grants when you were in college—a move intended to target relief toward lower- and middle-income families.

And if you’ve made any payments on your student loans between March 2020 and now that brought you below the $10,000 or $20,000 level, you can get those payments refunded to you.

 

Pay your interest on income-based loans

As long as you’re making your income-based student loan payments, the government will cover the unpaid monthly interest, to help ensure that the debt doesn’t snowball as you’re paying it off.

“Some current and most future borrowers will greatly benefit from the changes to interest accrual,” says Lauren Anastasio, CFP and director of financial advice at Stash. “Stories of interest accrual outpacing payments and responsible borrowers watching their debt grow, despite disciplined on-time payments, should be a thing of the past. This will ultimately make the prospect of borrowing less daunting.”

 

Reduce income-based payments

If you’re on an income-based repayment schedule, the amount you are required to pay has dropped from 10 percent of your discretionary income to 5 percent, and the threshold for how much income is considered “discretionary” has been raised to help reduce the required payment as well.

 

Forgive loan balances earlier

A federal student loan balance can be forgiven after 10 years of steady payments, rather than the current 20 years.

 

Easier loan forgiveness for public service workers

An existing program to forgive student loans for people who work in the public sector, like teachers, firemen, and nonprofit employees, was often difficult to apply for—and kept many who qualified from taking advantage of it. The new rules simplify the process for people to apply and receive loan forgiveness.

 

Continue the student loan pause until 2023

Student loans have been frozen throughout the pandemic, and the pause has been extended until the end of 2022 to allow time for the new plan to be implemented.

 

How student loan relief can improve your financial picture

For many Americans, the new student loan plan could make their financial future a whole lot rosier. “The changes to federal student loans may allow families to prioritize their financial goals differently,” Anastasio says. “With lower levels of interest accrual, aggressively paying down these loans may become less of a priority, freeing up more cash for other goals like saving for a home or starting a family, paying off other debts, or investing.”

But what should you do first if you’re benefiting from the new rules? Here’s what financial experts recommend.

Hold off a bit on making any big changes

While the news may have you trolling Zillow for your first house or shopping for a new EV, but it may be best to err on the side of caution for the moment. “It’s not totally clear exactly what the impact is, since it’s likely to be legally challenged,” O’Connell Rodriguez says. “I wouldn’t spend the money before I saw it reflected in my account balance.”

You’ll definitely want to watch for news on the progress of this plan. “For most borrowers, the forgiveness will not be automatic, so you may still need to keep tabs on when an application process becomes available and apply for the forgiveness.

Create (or boost) your emergency fund

With a recession potentially on the horizon, it pays to have money saved in reserve—at least enough to cover three to six months of expenses. “You can pad your emergency savings while you wait and see what happens with the student loans,” O’Connell Rodriguez says.

Pay off high-interest debt

If you’re no longer saddled with federal student loan debt, it’s time to focus on any other high-interest loans you’ve taken on, such as credit card debt or private student loans.

If your private student loans are still an issue, consider giving your lender a call. “The best action is to be proactive,” O’Connell Rodriguez says. “If your debt payments are more than you can afford, call your lender and try to negotiation with them. It’s always worth a conversation, even if you aren’t successful.”

Start (or boost) your investing

“If you were spending $300, $800, $1200 on student loan payments and you already built that into your budget, don’t take that line item out of the budget,” O’Connell Rodriguez says. “Redirect that line item to continue building wealth.” Your 401K or IRA is the optimal place to put that money, to help you shore up your retirement.

Start saving for milestone goals

If marriage, a new house, a new baby, or another big milestone is in your future, the student loan forgiveness could speed up your timeline for your big life goals.

How to Get Your Finances Ready for a Recession

The rumblings about a recession began in early 2022, and economists predict there’s about a 50-50 chance of a recession happening in either 2022 or early 2023, thanks to inflation. Fortunately, most experts suggest that this will likely be a mild recession—nothing like the 2008 Great Recession that wreaked havoc on many people’s savings and careers. But there are some money moves you might want to consider to recession-proof your finances—and help you weather any uncertainty.

Financial Moves to Make Before a Recession

Pay off high-interest debt.

If you have credit card debt, personal loans, or other high-interest debt, the first task is to pay that off as quickly as possible. “Those need to be addressed immediately and prioritized over savings,” says Isabel Barrow, director of financial planning at Edelman Financial Engines. “The rates on these are usually higher than what you can make on your cash and the interest compounds. Think about it this way—if you lose your job but have no debts, you can always go back to the credit cards to get you through the rough patch.”

Shore up your emergency fund.

Once your high-interest debt is taken care of, bulk up your emergency fund. “During a recession, it’s common for the unemployment rate to rise quickly, and it doesn’t usually fall as fast during the recovery,” Barrow explains. “You need to ensure you are able to weather the storm in the event of any income disruption.” Barrow recommends that her clients stash six months to two years’ worth of income to cover themselves for recessions—but any amount you can save now will be helpful.

Reconsider big purchases.

If you’re still in the red-hot housing market or hoping to upgrade your car, you may want to step back, especially if you have any concerns about job security. “The level of demand is still very high for cars, houses, and travel, and the supply is very low,” Barrow says. “If you don’t necessarily need it now—don’t buy it.”

People who snatched up bargains in the last recession might be hoping to score a deal again—but they may be disappointed. Craig Birk, CFP, chief investment officer at Personal Capital, says that the prices won’t drop as precipitously as people saw during the 2008 recession, thanks to the excellent credit most homeowners have. “Supply and demand should remain more balanced in this cycle,” Birk explains. “With higher mortgage rates and lower affordability, home prices may drop, but only moderately.”

Managing Finances During a Recession

Review monthly expenses.

We all probably have a few spots where we could scale back on our spending—so review bank and credit card statements to see where you might be able to save. “Now is a great time to review the details of where your money goes,” Barrow says. You can put the money you save toward cash reserves or get a little more wiggle room in your budget in case expenses increase—or income decreases.

Assess job security.

As of July 2022, there have been a few reports of layoffs, but the job market remains incredibly tight, with unemployment at just 3.6 percent. Consider how well the company where you work is doing and your individual risk for a layoff. If you’re concerned about losing your job, now may be the time to update your LinkedIn account and check in with people in your network to see if new opportunities exist.

“The less secure your job is, the more you should be thinking about your backup plan now,” Barrow says. “Are there other options for you to generate short-term income, either immediately or in the event that you have a job loss or reduction?”

Don’t cash in investments.

Most investors took a significant hit in their 401k portfolios in early 2022, which makes cashing out or trading into more conservative investments seem like a smart idea. But experts say it’s much better to stay the course.

Now is not the time to convert investments to cash. “While markets are likely to remain volatile and unpredictable, cash is all but guaranteed to lose value to inflation,” explains Birk. “Long-term cash should be invested toward long-term goals, especially with higher inflation eroding spending power.”

And trading stocks that were solid performers in the past for more conservative choices will lock in your losses—and keep you from recouping those losses when the market rebounds. “Making more trades might give you a temporary sense of control, but it typically causes more harm than good,” Barrow says. “You’re likely just increasing your costs and taxes while decreasing your overall long-term performance.”

Reconsider retirement plans.

If you’re close to retirement (or already retired), you might need to adjust your plans—either by saving more money for retirement or being more frugal with the money you’re spending. “Those considering early retirement may look more closely and consider adding to reserves,” Birk says. “It’s also worth reviewing existing retirement spending goals in light of higher prices.”

Increase retirement investments.

It may seem a little scary to put more money into a volatile stock market, but as long as the money isn’t something you need in the next few years, it pays off to keep going. “A recession or bear market is not likely to have a major impact on your long-term plans, but it does mean that you may be able to be opportunistic now,” Barrow says. “We don’t often have opportunities to buy low, as the market is up more often than down, so consider if this is an opportunity for you—as long as it doesn’t mean you are taking a high risk or borrowing money to fund additional investments.”

[Untitled]

Leave a Comment