Are you seeking to craft a strong estate plan? Or do you simply wish to ensure that some of your assets are properly cared for? Either way, you’re likely digging in on how to arrange a trust.
A trust is not the same as an estate plan, which encompasses all aspects and assets of your estate. Rather, a trust is a simple legal arrangement that appoints a trustee, or settlor, to hold assets on your behalf. As the trustor or benefactor (the creator of the trust), you have complete control of the terms of the trust and can provide instructions for the trustee.
Unlike a will, a trust can be managed on an ongoing basis and does not need to be administered in court upon the event of your death. When this legal contract is created, your assets can be managed by a trustee, which can be either an individual or a financial institution. Essentially, a trust can ensure that the administration and distribution of your assets are handled in an efficient and timely manner.
The Benefits of Trusts
Before arranging a trust, you should make sure you are aware of the benefits of each type and how they suit your needs. This ensures that your assets are distributed according to your wishes when you pass away.
One of the main benefits of trusts is that assets can often be distributed quickly and with few hoops to the beneficiaries, family members, or a surviving spouse. Unlike a will, a trust can typically be used to avoid probate court when distributing trust assets. Avoiding probate also ensures privacy, as probate is a public record.
Using a trust can also save money in both court fees and estate taxes. It can also aid in protecting your estate from creditors as well as beneficiaries who have poor money management skills.
As mentioned above, specific control is another benefit of trusts. When you set up a trust, you can dictate the precise terms for the distribution of wealth and assets. This can be especially beneficial in situations where there are complex family arrangements or a large amount of generational wealth.
What are the different types of trusts? The three main types of trusts
You may be asking yourself, What kind of trust should I have? Knowing what type of trust is the best for you really depends on what you’d like the terms to be and what your personal plan and goals call for. Following is a short summary answering a popular question: What are the three types of trusts? Speak to a wealth manager or an estate planning attorney for more information and guidance on what type of trust is best for you.
A living trust is also called a revocable trust. It is also one of the most common types of trusts. A revocable living trust is like having a will that can be easily changed at any time. This low-maintenance arrangement helps you avoid the probate process and considers you as the owner of the assets, even though those assets are being managed by the assigned trustee.
The trust grants you the ability to amend or revoke the trust as you see fit during your lifetime. You can also continue to earn income on the assets included in your trust. However, upon your death, the revocable trust becomes irrevocable. While there is no specific tax advantage to a revocable trust, the flexibility to make changes is very appealing.
Testamentary trusts are created by your last will and testament upon your passing. Unlike a living trust, which avoids probate, the assets contained in a testamentary trust will still go through a court process. The main benefit of testamentary trusts is that the assets do not need to be transferred to the trust until your death. Two benefits of trusts arranged in this way are that you don’t have to fund the trust during your lifetime and you still maintain control and access to all of your assets.
An irrevocable trust, while still created during your lifetime, is one that cannot be changed. Upon its creation, all included assets are transferred to the trust. Even though you are the benefactor, you no longer have a right to the assets. However, this also means that you can no longer be taxed on them by the IRS as a part of your taxable estate.
Other types of trusts
We’ve answered the question, What are the four types of trusts? But while those are the main types you might consider, there are other different types of trusts you should also be aware of in order to provide the best for your loved ones or a named beneficiary.
Grantor Retained Annuity Trust (GRAT)
This type of irrevocable trust is created to ensure that the future appreciation on quickly appreciating assets can be quickly and easily granted to the next generation during the grantor's lifetime. It is a good trust for establishing generational wealth.
A charitable trust is created to distribute assets to chosen charities. The trust can be arranged in a manner that distributes assets to both a charitable organization(s) and your beneficiaries. There are also a few types of charitable trusts with different terms, allowing you to ensure your remaining assets are distributed in the manner you wish. Speak to a fiduciary about a charitable lead trust, a charitable remainder trust, and others if you are interested in this type of trust.
If you’ve selected a beneficiary that may not be the most financially responsible individual, a spendthrift trust might be suitable. Instead of granting the beneficiary or multiple trust beneficiaries all your assets as one large inheritance, the terms of the trust will transfer assets in increments This trust fund prevents the depletion of your generational wealth and also protects the assets from creditors.
Somewhat similar to the spendthrift trust is the Totten trust. This is a trust that is set up while you are alive, usually at a bank. Although a beneficiary is named, they do not have access to the funds until your death.
This type of trust is created for beneficiaries that have disabilities and may be receiving financial support from the government. Often, financial support from government benefits is limited or disqualified if the special-needs individual does not meet specific income requirements. This trust can provide additional financial support without fear of disqualification.
Suppose you want to pass down assets or generational wealth to your grandchildren. You would set up a generation-skipping trust to skip over your own children and pass the inheritance to your grandchildren.Having gained a better understanding of the different types of trusts, you should also be aware of the different specifications and benefits of each trust. With this information, you can move further along in the development of your estate plan. Speak with an elite team of wealth managers to determine your eligibility and help you make an informed decision and ensure a solid financial future for your beneficiaries.