A common misconception is that trusts are reserved for the wealthy. The truth is, many people can benefit from a trust. Do you think you are one of those? You may be surprised. There are many types of trusts that a family can set up. It all depends on what you want the trust to accomplish. Here’s a few things to consider when setting up a trust:
What is a trust?
Generally speaking, a trust is a legal entity that is central to a three-part agreement in which the owner of an asset, the trust grantor (This is you); transfers a legal title of that asset to a trust for the purpose of benefiting one or more beneficiaries. I should have warned that trust language can be kind of wordy, so please bear with me. The trust is then managed by one or more trustees. You can determine who the trustee might be. Either a loved one, close friend or relative, or even a financial institution. Trusts may be revocable or irrevocable, and may be included in any will to take affect of death.
Revocable trusts can be changed or revoked any time. For this reason, the IRS considers any trust assets that will be included in the grantor taxable estate. This also means that the grantor must pay income takes on revenue generating by the trust, and possibly estate taxes on those assets remaining after his or her death.
Irrevocable trusts cannot be changed once they are executed. Simply put, “Once you move, you lose”. The assets placed into the irrevocable trusts are permanently removed from a grantor’s estate, and transferred to the trust. Income of capital gain, taxes on assets in the trust are paid by the trust. Upon a grantor’s death, the assets in the trust are not considered part of the estate, and therefore not subject to estate taxes. Most revocable trust become irrevocable at death, or disability of the grantor.
The role of the trustee:
The trust grantor named the trustee to handle investments and manage trust assets. The grantor can work with the trustee on major decisions, or the trustee can be assigned full authority to act on the event of death. A trustee may be an individual or may be a professional or corporate trustee. Trustees have a responsibility, known as “fiduciary responsibility” to act in the grantor’s best interest.
Benefits of the trust:
Although, trusts can be used in many ways, they are most commonly used to
- control assets and provide security for both the grantor and the beneficiaries
- provide for beneficiaries whose require expert assistance managing money, avoid estate tax or income taxes, provide expert management of estate
- avoid probate expenses
- maintain privacy
- protect real estate holdings or a business.
Most people use trusts to help maintain control of assets, or they are alive and medically competent, as well as indirectly make control of the decision assets if they are medically unable to do so in event of death. This has been the underlying reason for many of the trusts that my clients have set up. Overall, the trust offers flexibility to meet your needs. If a kind a trust are designed to make this an objective. For example, if you goal is to insure privacy in the settlement of your estate, to centralize control of assets are to take full advantage of the estate tax credits provided by the IRS, you might choose a living trust
Types of Trusts
- A living trust allows you to remain both the trustee and the beneficiary of the trust while you are alive. You may take control of the assets and receive all income and benefits. Upon your death, a designated successor trustee manages and/or distributes the remaining assets according to the terms set in the trust, avoiding the probate process. In addition, should you become incapacitated during the terms of the trust, your successor or co-trustee can take over the management.
- To help benefit your favorite charity while serving your own trust purposes, you might consider a charitable lead trust. This trust let’s you pay a charity income from a particular asset for a designated amount of time, after which the principal goes to the beneficiaries who receive the property free of estate tax. However, keep in mind that you will need to pay gift taxes on a portion of the value of the assets you transferred to the trust.
- Another charitable option, the charitable remainder trust, CRT, allows you to receive income and tax deduction at the same time, and ultimately leaves assets to a charity. So this trust, the trust will sell the donated part of your assets tax-free and establish an annuity payable to you, your spouse or your heirs for a designated period of time. Upon completion of that time period, the remaining assets go directly to the charity. Highly appreciated assets are typically the funding vehicles of choice for a CRT.
- If you want to leave money to your grandchildren, you might consider a generation-skipping trust. This trust can help preserve your $3.5 million (in 2009) generation-skipping transfer tax exemption on the quest to your grandchildren avoiding the tax on the bequests exceeding that amount, which can be up to 47%.
- An irrevocable life insurance trust, ILIT, is often used as an estate tax funding mechanism. Under this trust, you make gifts to an irrevocable trust, which in turn uses those gifts to purchase a life insurance policy on you. Upon your death, the policy’s death benefit and proceeds are payable to the trust, which in turn provide tax-free cash to help beneficiaries pay tax obligations.
- Other type of trust could be special needs trust. Special needs trusts, or supplemental needs trusts, provide the means to care for a disabled child (or adult) after the parents or guardians have passed away.
Is a trust right for you?
Increasing numbers of Americans are discovering the potential benefits of a trust and setting up an estate plan, how it can help protect their assets, reduce their tax obligations, and define the management of assets according to their wishes in a private, effective way. As your financial planner, I can help you evaluate a certain type of trust to determine if it may be appropriate for your circumstances.