A trust allows you to be specific about how, when and to whom your assets are distributed. Trusts can be arranged for a variety of different goals: to reduce estate taxes, to transfer property and to preserve assets for minors or a charity.
Trusts offer more flexibility than a will to control your assets. You can structure trusts to protect beneficiaries from creditors and to manage their state income taxes. Certain types of trusts allow you to avoid having your estate go through probate — a court-supervised process that determines your will’s validity and distributes your assets after death, which can take several months and much of it is public record.
All trusts fall under two main categories: revocable and irrevocable.
A revocable, or living, trust helps you get things in order before you’re unable to do so if you’re diagnosed with a debilitating condition. When the day comes, the successor trustee takes over managing the trust assets for you.
You can name yourself as the trustee and appoint a co-trustee to maintain control of all assets — to be amended or revoked at any time. A trust can lower the costs and hassles of probate, preserve privacy and prepare your estate for an easy transition.
Assets in a living trust will generally pass to heirs sooner, giving your family better financial protection, but don’t include any tax benefits or protection from creditors. For that, you might consider an irrevocable trust.
An irrevocable trust cannot be amended or revoked but is used to minimize estate taxes, protect assets from creditors and provide for family members under 18 years of age and those financially dependent or with special needs. Assets in an irrevocable trust technically aren’t yours anymore — the trust owns them.
Within these two categories, there are specific types of trusts:
- Credit shelter trusts are revocable trusts that are also referred to as bypass or family trusts. They’re used to transfer assets in order to lower estate taxes. Your surviving heirs receive an interest in the trust itself.
- Testamentary trusts are irrevocable, created by the terms of your will and, unlike other trusts, funded only upon your death.
- Grantor-retained annuity trusts are irrevocable and allow you to direct certain assets into a temporary trust and freeze its value, removing additional appreciation from the estate and giving it to heirs with minimal estate or gift tax liability.
- Education trusts are revocable and can only be used for educational expenses.
- Charitable trusts are irrevocable trusts whose assets go to one or more charities.
There are five general steps to setting up a trust:
- Determine what kind of trust best fits your needs.
- Create a trust document.
- Get the trust document signed and notarized. Depending on your state laws, you may need multiple trustee and witness signatures.
- Open a trust account. Trusts can hold cash, stocks, bonds, mutual funds, real estate and other property.
- Transfer assets into the trust. You can designate the trust as a beneficiary so the assets move to the trust once you pass away.
Trusts can be more expensive and complicated to draft than a will, but incurring additional costs on the front end could save your heirs money on the back end by avoiding the probate process. Let people know the trust exists, and share the thinking behind its creation to cultivate stewardship around the bequest.
This is just an introduction. If you think a trust can help you meet your financial and family goals, work with a lawyer well versed in the options.
