Many people think of trusts as financial havens for the ultra-wealthy. However, this widespread perception is changing, as more people with moderate wealth reap the benefits of having a trust fund as part of their estate planning. If you want your survivors to receive the maximum benefits from your hard work and savings, it is worth learning the advantages and protections a trust can provide.
What Is a Trust?
When you start a trust, you enter into a fiduciary relationship with a second party, known as a trustee. The trustee has the right to hold title to all assets and property in the best interest of a third party, your beneficiaries.
The trust’s primary purposes are to protect your assets legally and ensure the proper distribution of your assets to your beneficiaries after you have passed away. This estate planning instrument can simultaneously serveas a refuge from tax burdens, legal actions, and probate. Plus, there are many different types of trusts, so you can find one for your specific needs, with the help of an estate planning attorney.
How Does a Trust Operate?
When establishing a trust, you and your attorney transfer part or all of your assets to a trustee. Based on the terms of establishment, the trust rules govern such issues as beneficiary rights and the management of the trust assets before and after you die.
For the most part, the trust carries out your estate planning wishes while keeping the details of your trust confidential. Also, certain types of trusts can form a legally protective barrier around your trust assets that only the trust’s participants can go beyond.
What are the benefits?
Because of its versatility, a trust is more popular among various income and asset levels. Some potential trust benefits include:
- Shielding your assets from creditors
- Finalizing your asset distribution desires while you still have a stable mind
- Dictating the management and distribution of potentially contestable assets like copyrights, mineral rights, businesses, boats, and property
- Supplying a planned income stream for your surviving family members
- Saving your survivors from the trouble and high costs of probate and estate taxes
What Are the Six Categories of Trusts?
Trusts are available in many different types, but they all belong in one or more of these six categories:
- Revocable: A revocable trust can be revised or canceled during your lifetime.
- Irrevocable: An irrevocable trust is a trust that is binding from the moment of its inception or becomes irrevocable after you die.
- Funded: A funded trust receives funding from you throughout your life.
- Unfunded: An unfunded trust can receive funding after your passing or remain unfunded. As a result, an unfunded trust doesn’t protect you from external perils. Therefore, you should adequately fund your trust, either while you are alive, or upon your passing.
- Living: If you want your beneficiaries to enjoy and use your assets while you are still alive,you could use a living trust as a written document to approve this action.
- Testamentary: A testamentary trust details how you want your assets handled after your death.
What Are the Different Types of Trusts?
There seems to be a trust for almost any estate planning need. For example, suppose you want a portion of your assets to go to charity and the rest to your beneficiaries. In this case, a “charitable lead”, or “charitable remainder” trust allows you to allocate certain assets for specific charities once you pass away, and your beneficiaries would get the rest. Also, a charitable lead trust allows you to draw an income from your asset within a defined timeline.
Another type of trust is the generation-skipping trust. It gives you the option to distribute your assets to your grandchildren instead of your children. Even if your children pass away, a generation-skipping tax exemption protects your asset transfer to grandchildren from tax levies.
Here are some other types of trusts that may appeal to you:
- Bypass trust (B): If you are married, the irrevocable B trust benefits you by automatically transferring your assets to a trust in your name which can still benefit your spouse after your death. When your spouse dies, the IRS won’t levy estate taxes on your beneficiaries on any of the assets in this trust.
- Spendthrift trust: This type of trust acts as a safeguard against any creditors or lawsuit litigants from attempting to collect on your beneficiaries’ liabilities from the trust. Additionally, if your beneficiary has a spending/gambling/substance abuse problem that gives you concern, in this arrangement, the beneficiary cannot promise or sell any assets in the trust. Only the trustee can distribute funds from the trust to the beneficiary.
- Totten trust: This revocable trust allows you to make regular deposits into an account at a bank or other financial institutions for posthumous gifting to your beneficiaries without going through probate.
- Special Needs Trust—this type of trust can ensure that a disabled loved one can be taken care of throughout their life, while still being able to remain eligible for public assistance such as SSI or Medicaid, if drawn and drafted properly.
Considering a Trust
After you have spent your lifetime accumulating your wealth, it’s only natural to want your heirs to benefit from your sacrifice and labor without worrying that your assets may be depleted or whittled away by taxes, probate, bad personal habits, or legal battles over who gets what. If these are concerns of yours, consider seeing an estate planning attorney for one or more trusts.