Estate Planning Basics: Trusts

By on May 8, 2018
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What Is a Trust?

A trust, also called a trust fund, is a legal arrangement between a grantor, a trustee, and a beneficiary. The grantor creates the trust and names to whom and when assets should be distributed. The trustee holds legal title and manages the trust for the beneficiary. The beneficiary is the person who ultimately receives the benefits of the property named in the trust.

Like a Will, a trust describes what should be done with property or assets named in the document. However, a trust is not subject to probate and allows beneficiaries to receive property and assets faster. To avoid probate successfully, assets must be re-titled in the name of the trust.

Some reasons to consider a trust are to provide for minor children, manage personal assets if you become incapacitated, avoid the probate process, reduce estate taxes and provide liquid assets to help pay for them, and keep matters private; trusts are not made public like Wills.

Benefits of a Trust

The many benefits of setting up a trust include:

  • Avoiding probate – By avoiding the probate process, your beneficiaries will obtain property and assets more quickly than if you only had a Will. Avoiding probate saves time, minimizes or avoids court fees, and reduces your estate taxes.
  • Controlling your wealth – You can specify when and to whom distributions be made.
  • Protecting your legacy – A trust can help protect your assets from your creditors.
  • Maintaining your privacy – Trusts are not a matter of public record like Wills. Keeping the transfer of assets private allows you to minimize the amount paid to court fees and taxes.

The Difference Between a Trust and a Will

Trusts and Wills serve different purposes and a trust does not replace a Will. Trusts are established to manage specific assets like life insurance or real estate with special conditions. Wills are established to manage your entire estate.

Do I Need a Trust?

Unlike Wills, not everyone needs a trust. Unless you have a certain amount of assets or specific instructions on how you want assets distributed to your beneficiaries, it may not be worth the expense. If, for example, you have a net worth of over $150,000 and a significant amount in real estate, you may have very specific ideas of how you want those assets distributed and a trust may be the best option.

Common Types of Trusts

The most common types of trusts are Living Trusts and Testamentary Trusts. A Living Trust, also known as an “inter vivos”, allows you to retain control of your assets during your lifetime. A Testamentary Trust is established in your Will and only goes into effect after your death.

Living Trusts

A Living Trust allows you to retain control of your assets during your lifetime and avoid probate. Living Trusts are revocable – able to be changed or dissolved at anytime while you are still alive. Upon death, Living Trusts become irrevocable – unable to be changed.

Typically with a revocable Living Trust, you may choose to name yourself the trustee and beneficiary. You can also name a trustee, in addition to yourself, to manage your assets in the event you become incapacitated and unable to speak for yourself.

The revocable Living Trust is the most common type of trust. People prefer and may need to have access to their assets throughout their lifetime. Even though revocable trusts bypass probate, the estate is still subject to taxes.

Irrevocable trusts remove assets from your control and transfer them out of your estate. Once you establish an irrevocable trust, you cannot make changes or dissolve the trust. If your primary goal is to reduce estate taxes and tax liability, an irrevocable trust may be more appropriate. Consult a qualified estate planning professional to determine which type of trust is best for you.

Testamentary Trusts

Testamentary Trusts are established in a Will. They allow you to place conditions on the assets you leave to your beneficiaries such as the age a child is to receive a large sum of money. The main reason to establish a Testamentary Trust is to prevent minors or other beneficiaries from receiving money or assets before they are capable of managing them. A trustee may be appointed to manage the trust until the beneficiaries meet the established age requirements.

Testamentary Trusts are subjected to probate. The appointed trustee must report to probate court annually. Many people managing trusts require legal assistance in fulfilling their duties as trustee; legal fees and court fees can be costly.

Other Trusts For Specific Scenarios

Credit Shelter Trusts

Provides benefits for the surviving spouse and is part of the taxable estate.

Charitable Lead Trust

Gives assets to specified charities and the remaining assets to beneficiaries.

Charitable Remainder Trust

Provides the grantor with an income stream for a set time period and gives the rest to charity.

Generation-Skipping Trust

Allows you to transfer assets tax-free to grandchildren or later generations.

Irrevocable Life Insurance Trust

Excludes life insurance proceeds from the estate to reduce taxes and provides liquidity to the beneficiaries.

Qualified Personal Residence Trusts

Removes the value of your home and any other owned property from your estate.

Qualified Terminable Interest Property Trusts

Allows you to provide assets to family members from previous marriages. Your surviving spouse will receive income from the trust, and the beneficiaries will inherit the remainder upon the death of your spouse.

A trust is essential for effective wealth management.  Protect your privacy, manage your wealth and protect your legacy.  When arranging your estate, speak with a trusted legal advisor and financial expert to draft the best trust according your your specific needs.

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