If you want to ensure your assets are managed according to your personal views, then having an estate plan is essential. Many people think that wills are the most vital part of an estate plan, however, wills can be contested and may require its executors to go through a lengthy probate process. That’s why many people use trusts as a way to distribute their assets to relatives and loved ones.
With that said, that’s not the only reason you might want to establish trust. In this article, we will cover what trusts are, what benefits they bring, the different types of trusts, and where to start if you want to set one up.
What Are Trusts?
Trusts are legal agreements made between a trustee and a trustor. In some cases, trustors can go by different names, such as the grantor or the settlor. Essentially, the trustor is the person who creates the trust and is responsible for the transfer of assets in it. The trustee is the person or entity that’s responsible for managing those assets while keeping in mind the wishes of the trustor.
Much like a will, a trust can have beneficiaries. Those may be the trustor’s spouse, children, or other relatives and close friends. Additionally, a non-profit or charitable organization can be named a trust beneficiary. Those named as beneficiaries of a trust are able to receive assets from it, based on how the trustor decided to distribute them.
The assets that can be included in a trust are:
- Real estate property, including lands, homes, or investment real estate
- Deposit accounts held at banks and credit unions
- All kinds of investments (bonds, stocks, and money market accounts)
- Life insurance policies
- Business assets and interests
- Antiques and collectibles
The action of transferring assets into the trust and positioning them under the trustee’s control is called funding.
What Are the Benefits of Having a Trust?
At this point, you might be wondering what benefits a trust actually brings to you, your trustees, and your beneficiaries. There are several pros to having trust, including:
- Transferring assets without having to go through probate
- Having an asset management plan in case you become incapacitated
- Setting aside funds to care for a close person with special needs
- It helps establish specific requirements beneficiaries have to meet in order to receive their part of the trust
- It gives you a way to preserve your assets for the care of a child in case you pass away
- In some cases, it can reduce estate and gift taxes
Trusts help you prepare yourself and your loved ones for the future. It can become a vital part of your real estate plan and later-life planning, especially if you have children. Along with that, if you don’t trust that your beneficiaries can responsibly take care of your assets, a trust can ensure that they spend it wisely.
What Are the Different Types of Trusts?
Before diving into the nitty-gritty specifics of each kind of trust, let’s take a look at the two broader categories of trusts
Revocable Trusts
These types of trusts are often called “revocable living trusts,” and they allow you to have control over your assets while you’re still alive. You can make changes to a revocable trust or dissolve it entirely if you deem it necessary.
That’s why they’re referred to as “revocable trusts,” as you have the option to “revoke” them. Let’s illustrate with an example. Say you go through a divorce, or you buy a new piece of land, you may want to update the terms of the trust according to the consequences of these two events.
The great thing about revocable trusts is that they offer flexibility, as the transfer of assets and the guidelines you’ve set out for their management don’t become permanent until you’re no longer alive. By having a revocable trust, you can name yourself as one of the trustees and choose someone to be your successor trustee in the case of your inability to manage the trust any longer (incapacitation or death).
Additionally, revocable trusts aren’t required to go through probation, which means the assets you placed will go to their elected beneficiaries without having to pass through court. This not only makes the process more private but also makes it difficult for creditors to claim ownership over assets you have in a trust as a way to cover any outstanding debts you may have.
Irrevocable Trust
There are some irrevocable trusts that cannot be modified or changed in any way, but many grantors have a lot of control over the assets in their irrevocable trusts as long as they have authorization from the trustee to exercise those rights. Many irrevocable life estate trusts can be modified, changed, amended, or even revoked if the grantors, beneficiaries, and trustees are all in agreement. This is why one of the primary benefits of irrevocable trusts is asset protection.
In rare cases, those with irrevocable trusts can benefit from extra estate planning. For example, if a trust protects assets from the Medicaid spend-down but does not remove assets from a person’s taxable estate (thus, not protecting their assets from future estate taxes).
Irrevocable trusts work as a safeguard. They are able to create a safe haven for assets and protect them from claims of creditors, beneficiaries, or even government-run programs such as Medicaid. Along with that, an irrevocable trust can shelter certain assets from gift and estate tax, which may be appealing if you own a large estate and want to minimize the taxes you pay.
Special Types of Trusts
Apart from revocable and irrevocable trusts, there are other categories of special trusts that can be incorporated into your estate plan. The kind of trust you choose depends solely on what you need the trust for.
Marital Trusts
“A” Trusts, or martial trusts, can be created by one spouse for the other. In the event of the trustor spouse passing away, the assets in the trust, along with any additional income they might have generated, are given to the living spouse. A martial trust allows for the surviving spouse to not pay taxes on those assets. However, the heirs of the surviving spouse would have to pay for estate taxes when the remaining assets eventually go to them.
Bypass Trusts
“B” trusts, called bypass or credit shelter trusts, are another type of trust that married couples can establish as a way to minimize taxes for their heirs. This is a type of irrevocable trust that transfers assets from one spouse to the other once one of the two dies. In this scenario, the living spouse doesn’t hold the access directly. Instead, the trustee remains responsible for managing them, meaning they don’t go into the spouse’s estate. The remaining assets go to the beneficiaries when the second spouse dies, completely tax-free.
Charitable Trusts
There are two types of charitable trust: a lead trust and a remainder trust. Having a charitable trust allows you to choose certain assets to go to a specific charity (or multiple charities) and the rest of the assets to go to your beneficiaries. A charitable remainder trust enables you to get income from your assets for a certain period of time. Any remaining assets or income will go to a charity of your choice.
Generation-Skipping Trusts
In cases where you want to give your assets to your grandchildren instead of your children, you can establish the so-called “generation-skipping trust.” It lets you pass assets to your grandchildren so your children can avoid paying estate taxes on those assets. At the same time, you retain the option to allow your children access to any income generated from the assets.
Life Insurance Trusts
A life insurance trust is another type of irrevocable trust that you create specifically for your life insurance proceeds. In this scenario, the trust becomes your beneficiary, and when you die, the proceeds go directly into it. The trustee then manages the proceeds on behalf of your other beneficiaries. The main benefit of this trust is that it helps you avoid estate taxes on your life insurance payouts.
Special Needs Trusts
A special needs trust can be established to provide finances to a special needs dependent, whether that’s a child or another close relative. The great thing is that it does so without interfering with the money that is received from the government due to disability. The money in the trust can be used for daily needs or for medical payments.
Spendthrift Trusts
If you’re concerned about your heirs throwing away your inheritance, a spendthrift trust is a good choice for you since it lets you decide exactly when and how your trust beneficiaries can access your assets. Its entire purpose is to prevent misuse.
Testamentary Trusts
These are also called “will trusts” and are established through a last will and testament. Once you pass away, that trust is irrevocable. The main function of this trust is to ensure that beneficiaries can access its assets at a predetermined time.
Totten Trusts
This is also known as a “payable-on-death” account, and it lets you store money in a bank account. Once you die those assets get passed on to the person that you named as beneficiary of the account.
How Can You Set Up a Trust?
If you want to set up any kind of trust, you should consult with your estate lawyer and with financial planners like those at Alpha Wealth Funds. These trust experts will help you make the best decisions for your assets, taking into consideration what your end goal is and what is best for your current and future financial situation and that of your family. It’s never too early to prioritize financial planning, so don’t hesitate to reach out to learn more.
Please feel free to reach out to me on this or any of your investment needs or questions. I may not always have the answers at my fingertips, but I promise I will get them for you. Michael Torrence
Calendly link https://calendly.com/mt-awf/intro Work: 435.658.1934 Contact: 330.284.3211
Michael Torrence – Investment Advisor Representative: Michael was born and raised in Ohio and attended The Ohio State University. After College, he was commissioned as a 2ndLt in the United States Marine Corps. He attended his initial training in Quantico, Virginia, then graduated at the top of his Primary Aviator Class and was selected for the Strike (Jet) Platform.
Founded in 2010, our services include boutique hedge funds, separately managed accounts, financial planning, estate & trust services, private placements and in-house concierge services for high net worth individuals, families, and businesses.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All investments involve risk including the loss of principal.