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Trust Funds: Financial Advice from…Honey Boo Boo?

January 10, 2013
Estate Planning, Investing
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“Mama June sure gives good advice,” said no one ever. Until now.

June “Mama” Shannon, the mother of the strange but loveable Honey Boo Boo, may not seem like the type for “book learnin’,” but a recent interview revealed that she may be more financially literate than most Americans.

The reality TV superstar told TMZ that the $15,000 – $20,000 her family makes per episode of “Here Comes Honey Boo Boo” is equally divided into trust funds for each of her children. The funds cannot be accessed until her children turn 21, unless in the case of a medical emergency.

Now, as Mama June and Honey Boo Boo very clearly show, trust funds aren’t just reserved for the pedigreed, 1% we usually associate with trusts—they’re a great way anyone can ensure loved ones are taken care of in the future, with the added bonus of knowing funds will be used wisely.

What exactly is a trust fund?

A trust is simply a relationship in which someone’s assets are held by a trustee for specified beneficiaries. Although assets no longer belong to the grantor after they’re transferred, one may put provisions in place regarding the distribution of assets.

For example, you can leave a trust fund to your 18-year-old child, but you can choose to restrict his access to when he turns 21, or even until he graduates college. The money may not be yours, but you can make sure it gets used wisely.

There are many benefits of setting up a trust fund—such as asset protection, tax breaks and privacy—but it’s up to you to determine if the added benefits are worth the cost.

What types of trusts are available?

There are many types of trusts—in general, there are living trusts and after-death trusts, which can be deemed revocable or irrevocable. There are several subcategories, helping the grantor customize the trust for specific purposes.

One of the more popular trusts is a revocable living trust, meaning it is set up while the donor is still alive and the assets are revocable (can be changed at the donor’s discretion). Irrevocable trusts cannot be changed after they’re created, but they come with the added benefit of reducing one’s estate taxes. Testamentary trusts become operational after the grantor has already passed away, and are, for obvious reasons, irrevocable.

Some other trusts include:

  • Education Trust – The funds in the trust may only be used for educational expenses
  • Spendthrift Trust – This type of trust is used when a beneficiary is unable to make sound financial decisions for his or herself. The trustee decides the best way to spend the funds for the benefit of the beneficiary.
  • Gift Trust – If you’re looking to transfer property as a gift, you can create a gift trust in which the trustee will distribute the assets to the beneficiary according to terms laid out in your trust agreement. This option is best for assets totaling at least $100,000 due to high set up and administrative costs.
  • Charitable Trust – This type of irrevocable trust is established for charitable purposes in which assets are distributed to one or more charitable organizations.
  • Special Needs Trust – These trusts are designed for families who have children with special needs. It is difficult (if not impossible) to leave money to a special needs child without their benefits being revoked. A special needs trust lays out specific guidelines to allow smooth transition of funds from grantor to beneficiary.

Trust attorney Pamela Parker says, “this is the most important thing a parent can do to get ready for their child’s future – preserve their benefits to be sure they are taken care of, and leave money to the special needs trust to be sure they can live a good quality life.”

Should I set up a trust fund?

The two reasons one would seriously consider creating a trust are estate planning and divorce. Whether you’re of high net worth or in the middle class, most families with young children should have some sort of estate planning, including living or testamentary trusts.

Trusts also help in the event of a divorce. Tensions are bound to get high in the midst of divorce, so trusts ensure that money left to one’s child can’t get seized and misused by one’s ex-spouse. CPA Clint A. Costa says, “In situations where the divorced parents dislike and don’t trust each other, they might set up trusts to hold the life insurance proceeds.” In the event of a nasty divorce, you can protect your assets and make sure only your children will benefit from your life insurance proceeds.

Tips for Keeping Costs Low

Trusts offer a number of benefits, but they come with quite a hefty price. Between set up costs, attorney fees and regular maintenance, trusts can really rack up a bill that may cost more than they’re worth. Costa provides a few ways to try to keep the costs within reason.

  • Do your homework. Do your research and ask friends and family for any recommendations. Costa also suggests checking in with state or local bar associations for referrals, and to not be afraid to comparison shop. According to Costa, “most attorneys will provide a free initial consultation and should be able to give a pretty firm estimate of fees, or better yet, quote a fixed fee if the matter is straightforward.” As one could guess, there isn’t much uniformity in attorney fees, so getting a large sample is a good idea.
  • Do it yourself (but you shouldn’t). There are several websites that offer “do-it-yourself” trusts, but that isn’t a good idea. “Trust forms are a very small part of putting a trust in place. What you really want is someone with expertise who can…help you think through what you are trying to do and determine an effective action plan,” says Costa. Doing it yourself is a low cost option, but you’ll pay in time and effort.

It’s difficult to put a price on future financial security. A trust is definitely worth considering and can save you and your family a lot of time and effort in the future.

Though a grim subject, financial planning after you pass is a very important step in protecting the net worth you’ve worked so hard to build up. Don’t let your life’s work go to waste — develop a plan early to ensure your efforts will be appreciated for generations to come.