Trusts are an important part of your estate plan when you want to leave money to your minor children. Trusts ensure that money, managed by a trustee, is set aside and made available to them when they reach a certain age. Trusts are often complex, time consuming to set up and oversee, and cost you money. So you should have a good reason to go to all this trouble!
Here are some common benefits and objectives of using trusts:
Avoiding taxes: One common tax-saving trusts is an irrevocable life insurance trust. After you die, the proceeds from your life insurance policy (the death benefit amount) are added back into your estate, often turning an estate that isn’t subject to federal estate taxes into an estate that needs to write a substantial check to the IRS!
However, an irrevocable life insurance trust shelters life insurance death benefit proceeds from estate taxes. After setting up the trust, you still have life insurance, and your beneficiary or beneficiaries still receive the proceeds from your policy upon your death. But now, estate taxes may not be a problem.
Avoiding probate: By keeping certain property out of your probate estate, you may be able to avoid many of the hassles, costs, and lack of privacy concerns related to probate.
Protecting your estate (and your beneficiary’s or beneficiaries’ estate): One of the primary uses of trusts is to protect your property even after it becomes someone else’s estate.
For example, suppose that you want to leave $500,000 to your only son, but you’re concerned that before you can say, “sail around the world,” he will have spent the entire half million.
You can use a trust to parcel out the money to your son as you see fit. The trust can give him a little bit each year for some duration, and then a final lump sum at some age when you think he’ll be mature enough to protect the money as if he had actually earned it himself.
Or you can add conditions to how the money in the trust is dispersed, such as your son receives a little bit of money until a certain age, and then he gets the rest only if he graduates college or meets some other criteria you determine when you set up the trust.
Providing funds for educational purposes: Trusts can make money available to your children, grandchildren, other relatives, or even nonrelatives (your employees’ children, for example) for educational purposes, such as college tuition and living expenses.
You can set up and fund trusts that parcel out money for educational purposes with a no-school, no-money restriction.
Benefiting charities and institutions: You can help out charities by setting up some type of charitable trust that may, for example, annually give money to the charity while you’re still alive, give a larger amount upon your death, and then continue to make regular payments out of the remainder.
You can even set up a charitable trust to make regular payments to the charity for some amount of time but eventually “give back” whatever is left to you or, if you’ve died, to someone else in your family. Alternatively, you can set up a charitable trust to work the other way — pay you while you’re still alive, and upon your death, the remaining amount in the trust goes to the charity.
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Source:http://www.dummies.com/how-to/content/benefits-of-setting-up-a-trust.html
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