Trusts are a time-tested pragmatic tool to help individuals and couples achieve specific goals, whether they are related to transferring assets, managing tax liabilities or protecting yourself or your family from other financial threats. Trusts are not just for the wealthy. However, they are not do-it-yourself projects. There are many different kinds of trusts, and it is important to know which one is the right one to achieve your goals.
Here’s the basic concept behind trusts: a trust allows an individual to separate the legal ownership of property from the beneficial enjoyment of the property. In “What Is a Trust, and Why Should I Have One?” Fox Business explains the different kinds of trusts, how trusts can be used to manage and preserve property and the relationship between the trusts, the beneficiaries of the trusts and the responsibilities of the trustees.
Revocable trusts are also known as living trusts. The creators of this trust can ensure the proper management of their assets during their lifetime and after they pass. A revocable trust can be changed at any time by the creator. However, instructions in the trust document tell the trustees how to act after the creator’s death. Revocable trusts are used in estate planning to pass assets to heirs in private and to avoid probate, which can reduce costs and stress.
Testamentary trusts. These are created in a person's will and they don't keep the assets out of probate. A court proceeding is required to fund the testamentary trust. Testamentary trusts provide flexibility.
Irrevocable trusts can be used to make gifts that allow subsequent protection from creditors and estate taxation. These trusts are typically created to hold high-value life insurance policies and keep the insurance proceeds out of the taxable estate of the insured person. The trust languagecan state that any trust money used for the beneficiary won't run into issues with Medicaid and Supplemental Security Income.
Charitable trusts, as the name implies,allows an individual to make a gift to charity but retain an interest in the donated property. Charitable remainder trusts will let you keep an income stream that continues for a specific time or for the rest of your life—the charity will receive any remaining funds at your death. These trusts provide income tax benefits from the value of the donation, even though you still receive income from the trust assets.
Other trusts are used for estate planning purposes, such as credit shelter trusts. These are used to preserve the estate tax exemption of a deceased spouse for future use. A Qualified Terminable Interest Property trust, or QTIP, gives a spouse access to funds while preserving their eventual distribution to children or other heirs. Finally, a Qualified Personal Residence Trust, or QPRT, lets you transfer an interest in your home to family members while you are still alive in a way that reduces gift and estate taxes.
All of these trusts have the same benefit: guaranteeing that your assets will be used to meet your wishes and provide income for you and your loved ones. Talk with an experienced estate planning attorney and see if you can benefit from establishing a trust for yourself or your family.
Reference: Fox Business (September 7, 2015) “What Is a Trust, and Why Should I Have One?”