(This article is adapted from The Book On Retirement: Are you ready for the Second Half of your financial life? by Kevin Houser and Gary Plessl.)

Most people think estate planning is about their death. But it’s really not. It’s about your control over your assets — control while you’re living, and control after your death. One of the most basic ways to gain control is through a simple will. But for people with more complex concerns, a trust can also come in handy for controlling your assets.

Trusts aren’t for everybody, though. While roughly 75 percent of our clients ask if they need a trust, less than half truly need one for what they are trying to accomplish. Often, a simple will can accomplish the same thing as a trust for much less than the typical legal cost of establishing a trust — a few thousand dollars.

What drives the need for a trust is the level of control you want to maintain over your assets. A trust provides flexibility — even creativity — with the control that a will alone might not.

What drives the need for a trust is the level of control you want to maintain over your assets.

— Gary Plessl and Kevin Houser

One common misconception about trusts is that they provide an extensive tax shelter. Generally, having a trust won’t save you or your heirs any more in taxes than basic estate planning. Trusts can help avoid estate taxes, but federal estate taxes only impact a fraction of 1 percent of the population — those with well over $5 million in assets.

What a Trust Is

A trust is a legal arrangement in which a person’s property or funds are entrusted to a third party to handle that property or funds on behalf of a beneficiary. A typical example would be a parent who wants to leave assets to a child, grandchild or even a charity.

The parent might establish a trust in which upon his or her death, certain funds will be held by a financial institution (that’s the third party) to be distributed to the heir upon her 18th birthday. Or if the parent wants to ensure the child has a financial foundation well into adulthood, the funds might be dispersed in annual increments through age 30, 35 or 40 or whatever the parent decides.

In that example, the parent — the person who creates the trust — is known as the “settlor.” The “trustee” can be an individual, an institution or a combination of both and is responsible for managing the property owned by a trust for the benefit of the beneficiaries.

Two Types of Trusts

There are essentially two basic types of trusts. A living trust or “inter vivos,” is one in which the settlor is still alive. A testamentary trust doesn’t take effect until after one’s death; it’s set up as a provision in a will.

Living trusts can be either revocable or irrevocable. With a revocable trust, you can make changes if, for example you subsequently get divorced or a beneficiary faces a major life change like an accident leaving him mentally debilitated. Or perhaps a beneficiary, as he becomes a teenager, starts exhibiting irresponsible behavior that makes his parents doubt whether he’ll have the maturity to receive a lump sum and would be better served receiving installments well into his adulthood.

With an irrevocable trust, the settlor gives up ownership (or title) of the property to the trustee. At that point, to make changes, the settlor would need to get the permission of the trustee and beneficiary. Because the trust property is no longer owned by the settlor, it’s also no longer a part of the settlor’s estate, so it provides a level of protection from taxes and other threats to your assets. In a divorce or bankruptcy, funds in an irrevocable trust likely wouldn’t factor into a settlement

How Trusts Can Address Your Concerns

Now that you understand what a trust is, the next question is: What can you do with it? Here are a few common estate-planning concerns and the types of trusts that might help address them (there are more in the book):

Concern: You want to avoid estate taxes.           

Solution: A Credit Shelter Trust (CST)      

For married couples with a sizable net worth, a credit shelter trust (CST) can help them — or more accurately their heirs — avoid estate taxes. Basically, both spouses write into their wills a provision setting up the CST. Upon the death of the first spouse, the CST springs to life and is funded up to the federal estate tax exemption amount, which (indexed for inflation) is $5.43 million per person or $10.86 million per couple in 2015.

Suppose the couple has a net worth of $12 million. Upon the death of the first spouse, $5.43 million would move into the CST, which would let the surviving spouse use a small percentage of that money for income. But because the funds were moved into a trust, they are no longer part of the estate. When the second spouse dies, the funds in the CST can pass to the heirs free of federal estate taxes.

So because of the CST, the second spouse’s estate is approximately $6.6 million rather than $12 million. And of that $6.6 million, upon the death of the second spouse, he or she could shelter $5.43 million of the estate using the unified credit exemption. In the end, after both spouses die, less than $1 million of the original $12 million is subject to estate taxes.

Concern: You want your money to last long enough to benefit your grandchildren.          

Solution: A Generation-Skipping Trust (GST)

In a Generation-Skipping Trust (GST), the assets put into the trust are transferred to the grandchildren. This is not necessarily about disinheriting your children, though.

For one thing, you can set up the trust so the children can draw the income/earnings from the trust while the grandchildren stand to inherit the balance. One big advantage to this is avoiding estate taxes.

For example, let’s start with a hypothetical $10 million estate that’s vulnerable to an effective 40 percent in federal and state estate taxes. If that estate passes to the children, it would be reduced to perhaps $6 million. Now suppose the children live off the earnings from the $6 million, but manage to preserve the original $6 million and later pass it on to the grandchildren and that this time $6 million is vulnerable to a 30 percent effective estate tax. The result is that the grandchildren are receiving just $4.2 million.

In such an instance, setting up a GST that gave the parents access to earnings from the trust but kept the original funds in the trust for the grandchildren would have accomplished pretty much the same thing but saved the grandchildren $1.8 million.

Other times, a GST is indeed about skipping a generation. Perhaps your son has remarried and you’re concerned his second wife won’t necessarily pass along his wealth to the children of his first wife. If that’s the case, you might not want him to ever take ownership of the assets, because once he does, it becomes marital property. A GST could carve out an inheritance for them.

Concern: You want your estate to reach your heirs but also want to take care of your spouse.

Solution: Qualified Terminable Interest Property Trust (QTIP)

Similar to a GST, a Qualified Terminable Interest Property or QTIP trust can let you pass earnings from assets to one person while the assets themselves will wait in trust for, say, your children, possibly decades after your death.

Upon the death of the first spouse, typically the assets of the deceased are transferred to the spouse if that spouse didn’t already own them as marital property. But the QTIP enables the first-to-die spouse to actually control how his or her assets are distributed after the other spouse dies.

You could simply will your assets to your spouse and hope that he or she will then pass them on to your heirs. But suppose the spouse has children from another marriage: will they also get a piece or even most of your estate? Or suppose your spouse is terrible with money and you wonder whether your estate will survive long enough to make it to your children. Or what if you’re concerned that your spouse will remarry and the new spouse takes marital ownership of your estate? The QTIP can be a perfect remedy for these concerns.

Let’s say you fund a QTIP with $5 million. That $5 million would be put in a trust for your children to receive upon the death of your spouse. In the meantime, although your spouse couldn’t touch the $5 million or change the trust, he or she can receive the earnings from the $5 million (which at 3 percent interest is $150,000 per year).

Concern: You don’t want your heir to take his IRA benefit check to the Ferrari store.

Solution: An IRA Trust

Normally, with IRAs you name a beneficiary and he or she receives the money upon your death. But what if you have $3 million in your IRA and that child is 15? One way to control that is to put the money in an IRA Trust where the child will get the money in installments well into adulthood.

An IRA Trust can also be set up like a QTIP, where it can support your surviving spouse with the income it generates, but the principal assets will go to the heirs designated in the trust.

Some Cautionary Advice

Beware of the fly-by-night trust mills doing seminars and selling people trusts they don’t really need for thousands of dollars. At best, they are selling — usually to seniors — trusts that are unnecessary. At worst, they are selling financial instruments chosen more for the sales commissions they generate than for the client’s needs, and they actually leave the victim less financially secure.

Time and again, we’ve seen trusts set up by a trust mill that never get funded. If the property or funds never get transferred to the trust, the trust is completely useless after the person dies.

Legal or not, these types of trusts are essentially scams. Your trust should always be set up by a qualified estate attorney and you should have your accountant and financial planner in the loop.

Next Avenue Editors Also Recommend:

• 5 Steps to Creating Your Digital Estate Plan
• Americans’ Ostrich Approach to Estate Planning
• What You Should Tell Your Heirs While You’re Around
• 2 Money Moves to Help You Leave a Legacy