NEW YORK (MainStreet) – If personal finance was a teen movie, the trust would be the blonde, snotty rich kid who wins all the ski races and uses his flawless martial arts technique to sweep some working-class kid's injured leg.

It's just a shame the trust has been miscast.

“I think many people hear the word 'trust' and immediately they think of the wealthy and think it's not something that they will ever need,” says Kim Dula, a partner at Marlton, N.J.-based Friedman LLP. “Quite honestly, that couldn't be further from the truth.”

A trust isn't Billy Zabka. It isn't just the word you throw before “-fund kids” when you're trying to disparage young urban dwellers. It's an incredibly useful tool that can not only pass on money and property of any kind to another generation, but can do so without saddling them with a huge tax burden. It's also a layer of protection between its recipients and those who want to get a hold of their newfound windfall.

As Dula notes, a trust can prevent young children from getting life insurance money or proceeds directly at an age when the trust's founder (or grantor) doesn't think they can handle it. It can provide a lifetime of care for a person with disabilities, as well as an advocate for that person. It could also ensure that someone battling various addictions isn't left destitute by their struggles. It can even provide for the needs of a surviving spouse by paying bills and handling the administrative details once covered by the grantor.

It accomplishes all of this by appointing a trustee to control the assets of the trust based on the grantor's wishes and administering those assets when the grantor cannot or after the grantor's death.

“I'm a big proponent of trusts for two reasons,” says Mela Garber, a tax principal at New York-based Anchin, Block & Anchin and chairwoman of the firm's trusts and estate services division. “Trusts protect the beneficiaries from creditors and trusts protect beneficiaries from themselves.”

Garber has set up several trust specifically for paying out IRA accounts and notes that one of the big benefits of that process is protection from lawsuits and creditors. Sure, that can mean protection from bill collectors and credit agencies, but a trust can also be worded to prevent ex-spouses from claiming a share of assets for themselves or for alimony payments.

“When people typically think of creditors, they think of credit card companies,” Dula says. “The most common creditors, however, may be a spouse or future spouse. When parents have young children, they may not be thinking about the future spouses of those children, but you may want to revisit that if they marry someone who may cause a problem later on or someone you may not have chosen for them.”

A trust can also prevent Uncle Sam and your home state from taking a cut. Garber notes that certain trusts do not have to pay income taxes. In New York City, for example, if a New Yorker sets up a trust in New York and all the trustees are outside New York and there are no sources of income from New York, that trust is not liable for taxes from New York City or state. That's no small deal, as state and city taxes can take as much as a 14% bite out of a directly distributed IRA.

As for that self-protection Garber alluded to, she points out that a lack of financial acumen can be just as dangerous to assets as any creditor.

“Individuals can be protected from themselves, because not everybody handles money the right way or has the financial knowledge to handle finances properly,” Garber says. “For certain individuals, it's helpful to have the money in the trust because a professional trustee, bank or family member could help them make the right decisions about spending the money that they inherited.”

So what kid of trust is right for you? Garber notes that for people at most income levels, a revocable trust of some sort is the way to go. The grantor can change its terms at any time and, once assets are placed they don't have to go through probate after the grantor passes away, as assets in a will might. In that case, Garber notes, a will goes to the attorney, who takes it to surrogate court, which then has to review it. In New York, it takes a month to have the will go through probate and to have the executor appointed. In the meantime, the assets can't be used to pay bills and interest accrues on all unpaid bills.

With a revocable trust, the court system gets a pass altogether and a trustee administers all payments and distribution.

“I can imagine in terms of legal fees and the time it takes to get through the process, a trust can help there tremendously,” Dula says. “The assets that pass upon someone's death, if they're within a trust, aren't flowing via the outline of the will, and it's cited in the trust document who the beneficiaries are. It adds that layer, and that layer could be costly otherwise.”

Not that a trust is without its costs. One of the reasons a trust is generally considered a rich-man's game is that, as Garber notes, the cost of setting up a trust can typically range between $5,000 and $10,000 — though trusts can be established for as little as $2,000. Also, while you can appoint a trusted, financially knowledgeable family member as a trustee, Garber notes that such a scenario can go awry. She especially advises against naming siblings as trustees; it can sow discord if one keeps hitting up the other for money.

Dula, meanwhile, advises having a conversation with any potential trustee and seeing if they're up for the fiduciary duties involved, and strongly advises naming a contingent trustee in case the first isn't up for it or isn't available at the time. If family members don't fit the bill, it may be time to ask a trusted lawyer or accountant to step in. In any case, that trustee will have to be paid under terms spelled out by the trust.

“Sometimes it's good to consider a corporate trustee, especially in situations where there are emotional ties or emotional issues tied to the trust in terms of current beneficiaries and remainder beneficiaries,” Dula says. “You want someone involved who knows the intentions of the trust and what the grantor wanted when the trust was created, and you want to make sure those goals are fulfilled whether it's 10, 20 or 30 years down the road.”

While hiring a professional trustee incurs some additional costs, Garber notes that the trustee is being paid to making decisions others won't and for financial knowledge that family members lack. Also, ongoing expenses including trustee fees and accounting fees are deductible from the trust if it's set up correctly.

While a a trust doesn't have to be a separate document and can be created through your will, Dula and Garber agree that it pays to invest in stetting up your will, power of attorney or trust documents professionally. It's not only making your surviving family's life easier, but it makes it easier on you by bringing in someone who's seen all of these documents in action and can cover questions you hadn't thought to ask. They can also advise you about tweaking your trust as children grow and laws change.

“I wouldn't say it's negative, but there is a cost involved in setting up a trust. When you consider all of the benefits that a trust offers, most of the time — especially with people who have substantial assets — it almost always pays off to have the trust set up. The benefit outweighs all the initial setup costs so much that it's not a difficult decision to make."

— Written by Jason Notte in Portland, Ore., for MainStreet

To follow the writer on Twitter, go to

This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.