Trusts are financial instruments that enable you to obtain specific goals for your loved ones and assets. They can help reduce taxes on your estate, provide protection from creditors, support your family after you are gone, and benefit charitable organizations for years.
A trust and a will can transfer assets to your loved ones, but a trust does it much faster because it avoids going through probate. It is a powerful tool for estate planning when set up correctly.
Benefits of a Trust
Creating a trust can provide several benefits to help ensure your assets go where you want them to go—and when. They are more difficult to challenge than a will, and you control the terms of the asset dispersal to your beneficiaries, including to those who cannot manage their own finances.A trust can accomplish these purposes whether you are alive or not, depending on how you set it up. They can also give you access and control of the assets while you are still alive, but it depends on the type of trust you create. It can also control and disperse assets through multiple generations. After a will goes through probate, its content is made public, but the details of a trust remain secret.
The Trust Management
The management of a trust depends on how it is set up and its purpose. In a revocable living trust, the grantor (the trust creator), Investopedia says, can be both beneficiary and trustee, or someone else can be chosen to manage it.In an irrevocable trust, the grantor cannot be the trustee, and the control of the assets is not under their authority. It is up to the trustee to disperse the assets according to the dictates of the trust documents, although the grantor can put into the trust document some degree of control.
Different Types of Trusts
Trusts come in many different names, and some have more than one name. Generally, there are two main types of trusts: revocable and irrevocable.A revocable trust, which may also be called a living trust, USBank says, can be changed by the creator when desired or even canceled. Changes can be made even if a trustee was appointed to manage the trust.
When a trust is revocable, you have a choice of what to do with it when you die. You can turn it into an irrevocable trust (or more than one) after you die or disperse all the assets immediately and end the trust. Keep in mind that a revocable trust offers no tax protection.
An irrevocable trust takes the assets in it and puts them beyond the control of the grantor. It is the feature that gives you a tax break. The trustee has control and must follow the dictates of the trust documents. Generally, you cannot change or remove assets from this type of trust—or it is very difficult to do so—but it may depend on your state.
Other Types of Trusts for Estate Planning
A trust attorney can build into your trust almost any feature you want. They have many purposes, and many kinds are readily available for your needs. You may be interested in a:- Charitable remainder annuity trusts (CRAT)—your children are named as the beneficiaries who receive a designated amount. The remainder of the interest goes to a designated charity. FidelityCharitable says you can also use it to give you a lifetime income to help with retirement.
- Special needs trusts (SNT)—When there is a child with special needs, an SNT can provide funds for the rest of the child’s life. Forbes says that because the funds are under the control of the trust, any funds in the account will not interfere with government benefits.
Taxes and Trusts
One of the primary purposes of having a trust is the tax advantages it can give. Some types of trusts will shield you from some taxes, but others do not offer any tax protection, such as a revocable trust.An irrevocable trust can offer some tax protection, but it does depend on how you create it. If you put a house in it, SmartAsset says, you will no longer own it. By naming yourself and your heirs as the beneficiary, you can continue living there, even after you die.
This situation removes the house from your assets, so you no longer own it, and is no longer part of your estate. It removes the house from the estate, and you will not pay any taxes.
Having a trust does not mean there are no taxes. Someone will pay them. Most often, the trust pays them out of the interest it earns. When an asset or interest gets distributed, the beneficiary will pay some taxes, usually at a lower tax rate. An alternative is if the grantor desires to pass on as much money as possible, they may choose to pay the taxes and let the trust funds continue to build.
Life Insurance and Trusts
If your assets get tied up for some time in probate, your spouse and children may have financial difficulty waiting for them. Medical bills, funeral costs, estate taxes, and property maintenance can produce a financial burden while waiting. MetLife says having a life insurance policy to cover these things and debts, regular living, and business expenses can be met with a life insurance policy put into an irrevocable life insurance trust. They are usually settled quickly and often do not require any taxes.How to Set Up a Trust
Tax laws are frequently changing, and they can be misunderstood. Setting it up incorrectly (using the wrong wording) may render it ineffective to reduce your taxes.When you want to ensure you get the best results from a trust, an experienced trust attorney to open a trust account. They can also notify you when you should make changes to ensure your beneficiaries receive the maximum amount of your assets.
The Epoch Times Copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
