You may believe you have your estate plan in place. You have written your will and have beneficiaries for your bank accounts, 401(k) accounts, and retirement plans. But you are not finished if you have not established a trust as part of your plan. There are different types of trusts, depending on your goals.
A trust can help you manage and protect your assets. An estate planning attorney can help you choose a trust that works best for you. You may decide you need more than one trust. By establishing a trust, your heirs can generally save money on taxes, and your assets can be passed on to your beneficiaries without going through probate.
What is a Trust?
A trust is formed when you, the trustor, transfer certain of your assets into the trust. The trust becomes the owner of the assets. You enter into an agreement with a person, called the trustee, who will manage the assets. This can be a family member or friend. As the name implies, this should be someone you trust.
You name beneficiaries and provide instructions in the document regarding how the assets are distributed upon your death. The beneficiaries inherit according to the established terms of the trust without the costs and inconvenience of going through probate.
What Types of Assets may You Transfer to Your Trust?
Some examples of assets you may transfer to a trust include:
- Real property (This includes houses or land even if you own the property as investment real estate)
- Bank and credit union deposit accounts
- Antiques and collectibles
- Jewelry
- Business assets
- Life insurance policies
- Any other assets you own
The trust is funded when the owner transfers ownership of the asset to the trust and places it under the trustee’s control.
How Does a Trust Benefit Me and My Beneficiaries?
There are advantages to both you as the trust’s creator and your beneficiaries. Here are a few of those benefits:
- Your assets transfer to your beneficiaries according to your instructions without going through probate.
- You can establish rules a beneficiary must meet before receiving their inheritance.
- You can use a trust to establish a health care plan for yourself if you should become incapacitated.
- There are often savings on gift and estate taxes.
Two Main Categories of Trusts: Revocable and Irrevocable
The two main categories of trusts are exactly what they sound like.
Revocable Trust
A revocable trust is also referred to as a revocable living trust. During your lifetime, you can place assets into the trust and remove them from the trust as you see fit. If a new child is born, you get a divorce, acquire new assets, or other life changes occur, and you may want to add or remove assets. A revocable trust allows you to do this.
As the name indicates, you can completely dissolve a revocable trust whenever you need or want to. You can be the trustee of the revocable trust and name someone you trust to be the successor trustee. This person will manage the trust and make sure your wishes are followed. The terms of the trust do not take permanent effect until you die.
Irrevocable Trust
If you create an irrevocable trust, you cannot change its terms. Whatever assets you transfer to this trust cannot later be removed. You must carefully evaluate your reasons for needing this trust and be absolutely certain you want to establish it.
Some reasons for establishing an irrevocable trust include:
- Protect your assets from claims by creditors
- Make it possible for you to get Medicaid if necessary
- Protects assets from beneficiary disputes
- Assets in this trust may be sheltered from estate and gift taxes
Special Types of Trusts That May be Right for You
You can establish a trust for almost any situation. When you create a specialty trust, you generally designate at the formation of it whether it is revocable or irrevocable. Some trusts, by their nature, are irrevocable. Some trust examples are:
Special Needs Trust
You place assets in this trust to benefit a special needs child or the care of a parent or other loved one. Since the trust owns the assets and not the individual, the ability to receive government benefits is not compromised. The trust can pay for their daily living needs or medical care.
Charitable Trust
You set up the trust to benefit a charity. This helps you create a legacy of giving. There are two ways to do this:
- A Charitable Lead Trust: You designate certain assets to a specific charity (you can choose more than one), with the rest of your assets going to your beneficiaries.
- A Charitable Remainder Trust: You receive income from your assets for an established period of time. The remaining assets go to your designated charity.
Life Insurance Trust
When you die, your life insurance proceeds go into this irrevocable trust managed by your designated trustee. The proceeds are distributed according to your wishes, and your beneficiaries avoid state taxes normally imposed on life insurance payouts.
Spendthrift Trust
This trust allows you to preserve the principal by specifying when and how the beneficiaries can ace the principal trust assets. You may allow beneficiaries access to the interest earned by the trust assets you have placed in the trust but restrict access to the principal.
Totten Trust
This is also called a “payable-on-death” account. You deposit money into a bank account that you have named a beneficiary. When you die, the money passes to a named beneficiary without going through probate. The disadvantage of this trust is that it only relates to money. Real estate or other property cannot be put into a Totten Trust.
This is only a limited list. You need to discuss with your estate planning attorney what type or types of trust will work best for your specific needs.
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