Establishing a trust as part of an estate plan is something you might consider for passing on wealth. While most trusts are created with one or more beneficiaries in mind, purposes trusts work differently. A purpose trust is what it sounds like – a trust created and funded for a specific purpose. These trusts can hold a variety of different assets but whether you need one or not can depend largely on your estate planning needs. Here’s what you need to know.
A financial advisor could help you put an estate plan together for your family’s needs and goals.
What Is a Purpose Trust?
A purpose trust is a trust that exists to carry out a specific purpose. This kind of trust generally does not have any named beneficiaries. Or if there is a beneficiary listed, it isn’t necessarily an individual person. Instead, the beneficiary may be an entity, such as a business, or a family pet.
There are different types of purpose trusts. One of the most common is a non-charitable purpose trust. This type of purpose trust is established with a non-human beneficiary in mind. So, for example, some of the uses for a non-charitable purpose trust include:
- Providing for shared ownership of business interests
- Establishing a fund to pay for the purchase and maintenance of a burial plot or gravesite
- Maintaining the care of animals that are considered assets, such as a racehorse or an AKA competition dog
- Holding shares in a private trust company (PTC)
- Passing wealth to unnamed charitable beneficiaries
- Funding expenses for the care of a pet after you pass away
- Holding real estate, such as a family home or investment property
- Funding social works projects that don’t fit within the charitable cause box
- Providing money to maintain antiques or collectibles, including artworks or rare vehicles
- Protecting intellectual property, such as copyrights, or digital assets
One of the more unusual uses of a purpose trust involves cryogenics. If you’d like to be cryogenically frozen when you pass away in the hopes of being revived through technological developments later, you could set up a purpose trust to hold your assets in the meantime. Purposes trusts can also be used to fund the cryogenic freezing of pets or genetic tissue.
How a Purpose Trust Works
The main difference between a purpose trust and other types of trusts is what it’s designed to do. A purpose trust is designed with a primary objective in mind and how it operates is based on that objective. So, for example, if you were to set up a trust for the maintenance of your burial plot after you pass away, the assets in the trust would be exclusively used for that purpose.
A purpose trust has a trustee just like any other trust. It’s the trustee’s job to manage assets in the trust according to the terms set by the person creating the trust. A separate protector may handle any administrative duties that the trustee is not responsible for.
Depending on whether the trust is established for charitable or non-charitable purposes and which state it’s created in, the trustee may be answerable to either the state attorney general or an “enforcer” who’s tasked with ensuring the terms of the trust are upheld. Enforcers can bring court actions requiring the trustee to do their fiduciary duty or modify the terms of the trust if its purpose is not being carried out.
The laws regarding purpose trusts can vary from state to state. Some states allow more flexibility than others, in terms of the types of purposes trusts you can establish and what you can use them for. There can also be limits on how long the trust can remain in effect after you pass away, though some states allow for perpetual trusts. A perpetual purpose trust can effectively last forever or until assets in the trust run out.
Who Needs a Purpose Trust?
For most people, something like a revocable living trust may be sufficient to meet your estate planning needs. A revocable living trust can be used to hold assets during your lifetime and beyond, on behalf of one or more named beneficiaries. A trustee manages those assets and you can serve as your own trustee, with someone named to succeed you.
Purpose trusts are usually more appropriate in situations where there’s a specific need to be met or you have assets that require some kind of ongoing maintenance or care. Say you don’t have kids, for example, but you do have a beloved dog that you want to make sure is taken care of should something happen to you. You might create a purpose trust to pay for the dog’s care after you’re gone.
You might also consider a purpose trust if you hold copyrighted intellectual property and you want to have a say in how it’s used after you’re gone. An author, for instance, might set up a purpose trust to block the publication of any posthumous works.
How to Set Up a Purpose Trust
Establishing a purpose trust isn’t that different from establishing other types of trusts. You’ll need to create the trust on paper, name a trustee and fund the trust. You can also name a separate trust protector. Most importantly, you’ll also need to include detailed instructions on how the assets in the trust are to be managed.
Thoroughness matters so that you don’t leave anything out. For example, if you’re creating a purpose trust to set aside assets for the maintenance of your antique car collection, you’d need to specify:
- Which vehicles should be included in the trust
- Where those vehicles are located and how they’re stored
- Whose name each vehicle is titled in
- What each one is worth
- How much is necessary to pay for maintenance and storage of those assets
Since purpose trusts can be more involved than living trusts, it may be advisable to get help from an estate planning attorney or financial advisor before setting one up. An attorney can cover the legal aspects of setting up a purpose trust that’s compliant with the laws in your state. Your financial advisor, meanwhile, can evaluate your financial situation and needs to help you decide if a purpose trust is right for you.
A purpose trust may or may not be part of your estate planning strategy but it’s still helpful to understand how they work. Also, consider where a trust, in general, might fit into your financial plans. Creating a trust can provide some reassurance that your assets will be handled the way you want, should you become incapacitated or pass away.
Estate Planning Tips
- Consider talking to your financial advisor about the different types of trusts and what use you might have for a purpose trust. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- While a trust can serve an important purpose in your estate plan, there are documents you might need as well. A last will and testament, for example, can ensure that your assets are distributed according to your wishes when you pass away. Without a will, your estate is divided up according to state inheritance laws. A durable power of attorney, an advanced health care directive and a life insurance policy can help to round out your estate plan.
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