Trust

An Estate Planning Trust is an arrangement between the Grantor and Trustee. The Grantor is the person who creates the Trust and transfers their assets into it. The Trustee is the person who manages the Trust according to the Grantor’s wishes. Typically, the Grantor is the acting Trustee until their death.

Like a Will, a Trust can have beneficiaries. Beneficiaries are typically your family, but it may also be a charitable organization. The beneficiaries are entitled to the Trust’s assets and are distributed according to the Grantor’s wishes. For a Trust to work, it must be funded. Funding happens when you transfer assets into the name of your Trust.

By putting your assets in a trust, you may be able to avoid probate, your beneficiaries may gain access to these assets more quickly than they might to assets that are transferred using a will. Probate is the formal legal process that appoints the executor or personal representative who will administer the estate and distribute assets to the intended beneficiaries after someone has passed away. 

The basic job of the administration and accounting for assets must be done whether the estate is handled by an executor in probate or whether probate is avoided because all assets were transferred to a living trust saving time, court fees, and potentially reducing estate taxes as well.

Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death.

Other benefits of trusts include:

• Control of your wealth. You can specify the terms of a trust precisely, controlling when and to whom distributions may be made. You may also, for example, set up a revocable trust so that the trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.

• Protection of your legacy. A properly constructed trust can help protect your estate from your heirs' creditors or from beneficiaries who may not be adept at money management.

• Privacy and probate savings. Probate is a matter of public record; a trust may allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.

Types of Trusts

 There are many different types of trusts. The main differences between them include who the trust benefits, how the proceeds are taxed and when the beneficiaries receive the assets. Some common types of family trusts include:

• Living trust. This type of trust holds your assets while you are still alive, as well as provides a plan for what happens to those assets after you pass away.

• Marital trust. A marital trust is an irrevocable trust that benefits the grantor’s spouse. This trust avoids incurring federal taxes when it’s transferred from the grantor to the beneficiary.

• Charitable trust. If a grantor wants to leave assets to a specific charity, they can do so through a charitable trust.

• Generation-skipping trust. These trusts are created to make large gifts to younger generations without having them incur heavy estate and gift taxes.

• Special needs trust. An important tool for recipients of Supplemental Security Income (SSI) or Medicare, income from this trust doesn’t count toward income caps for these programs and can be used for a variety of certain related expenses, like medication.

• Spendthrift trust. A spendthrift trust limits how beneficiaries can access their assets. For example, a beneficiary to these trusts cannot sell or give away their equitable interest in the trust property.

• Testamentary trust. These trusts are created in a will and are irrevocable once the owner dies. Beneficiaries can only access their share of assets at a predetermined time.

Another major distinction between them is whether they are revocable or irrevocable.

Revocable trust: 

Also known as a living trust, a revocable trust can help assets pass outside of probate yet allows you to retain control of the assets during your (the grantor's) lifetime. It is flexible and can be dissolved at any time, should your circumstances or intentions change. A revocable trust typically becomes irrevocable upon the death of the grantor.

You can name yourself trustee (or co-trustee) and retain ownership and control over the trust, its terms, and assets during your lifetime, but make provisions for a successor trustee to manage them in the event of your incapacity or death.

Although a revocable trust may help avoid probate, it is usually still subject to estate taxes. It also means that during your lifetime, it is treated like any other asset you own.

Irrevocable trust: 

An irrevocable trust typically transfers your assets out of your (the grantor's) estate and potentially out of the reach of estate taxes and probate but cannot be altered by the grantor after it has been executed. Therefore, once you establish the trust, you will lose control over the assets, and you cannot change any terms or decide to dissolve the trust.

An irrevocable trust is generally preferred over a revocable trust if your primary aim is to reduce the amount subject to estate taxes by effectively removing the trust assets from your estate. Also, since the assets have been transferred to the trust, you are relieved of the tax liability on the income generated by the trust assets (although distributions will typically have income tax consequences). It may also be protected in the event of a legal judgment against you.

Deciding on a trust

Having an Estate Plan makes sure your money and property are managed during your life and after you pass away. Many people use an Estate Planning Trust to transfer their assets to their families. There are many types of Trusts, each of which has a different purpose.

State laws vary significantly in the area of trust and should be considered before making any decisions about establishing your family trust. Check out this article from Forbes advisor. It provides some great information – a great starting point for beginning your journey toward estate planning for your family.

If you’re confused about how to tackle your post-life affairs, reach out to a professional for help. Consider finding an estate lawyer or a financial planner who can help answers questions about your specific needs.

When you are ready to have your documents notarized call, text or schedule your reliable, dependable notary appointment with D. Shephard Notary. We are always happy to help. 

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