Understanding the role of trusts can be crucial when planning your estate. Unlike a basic will, which primarily outlines your wishes after passing, a trust allows you to manage your assets during your lifetime and beyond.
Trusts provide several advantages, such as avoiding probate, reducing estate taxes and providing a structured way to distribute assets to beneficiaries. They also offer privacy and some can protect your estate from creditors and lawsuits.
Essential elements included in a trust
A trust involves three primary participants: grantor, trustee and beneficiaries. The grantor establishes the trust, the trustee manages it according to its terms and the beneficiaries receive the assets.
While trusts can vary widely, certain elements must be present to be effective. Here are essential terms to include:
- Current and successor trustees
- Current and remainder beneficiaries
- Description of initial trust capital and any additional contributions
- Conditions for income distribution to beneficiaries
- Specific powers of the trustees in administering the trust
- Appointment of a guardian for minor beneficiaries
- Protections against transfer of beneficiaries’ interests to third parties
- Trust’s term or time limit
- Provisions for trustee fees and bond requirements
Trust assets can come from several sources, including cash, real estate, securities, life insurance, business interests and personal property.
Revocable vs. irrevocable
Trusts generally fall into two categories: revocable (or “living trusts”) and irrevocable. Each offers a distinct advantage while serving different purposes.
- Revocable:
- Can be altered or revoked by the grantor during their lifetime
- Provides flexibility and control over assets
- Typically offers no tax advantages
- Suitable for managing assets and avoiding probate
- Irrevocable:
- Cannot be easily altered once established
- Removes assets from the grantor’s taxable estate
- Protects assets from creditors and lawsuits
- Offers potential tax benefits
The bottom line? Revocable trusts are flexible while irrevocable trusts are not.
Five types of specialty trusts
Trusts serve a variety of purposes. Here are five types to consider:
- Charitable: These trusts allow you to support charitable causes while potentially providing tax benefits.
- Grantor retained annuity trusts: A GRAT transfers assets to beneficiaries with reduced gift-tax obligations.
- Special needs: This trust provides for dependents with special needs without affecting their eligibility for government assistance.
- Spendthrift: If you’re concerned about how your beneficiaries might manage their inheritance, a spendthrift trust restricts access to the trust’s principal.
- Testamentary: Created through your will, this trust becomes effective upon your death and specifies when beneficiaries can access the assets.
Each specialty trust serves distinct purposes tailored to your needs and goals.
When considering adding a trust to your estate plan, it’s essential to carefully consider your objectives and consult a knowledgeable estate planning professional to determine which types are best for your situation.