Estate planning is an important process that allows individuals to protect their assets and ensure their wishes are fulfilled after they're gone. One crucial aspect of estate planning is the use of trusts. Trusts aren’t just for the uber-wealthy; using one in your estate plan can make sense no matter how much money you have.
A survey by Wealth.com found that three-quarters (76%) of respondents created an estate plan to take care of their families.
A trust could help you achieve that goal with its combination of privacy, asset protection, and the ability to avoid the potentially drawn-out process of probate.
Fortunes’ recent article, “Understanding Trusts: An important estate planning tool for Everyday Americans,” explains that at its core, a trust is a legal document that creates a triangle-like relationship between three different parties: the trust, its trustee, and its beneficiaries.
A trust—created by the grantor—says how assets can be used during their lifetime and how they should pass to the grantor’s beneficiaries when they die. Trusts offer an added estate planning perk: avoiding probate.
And while the word “trust” might be intimidating, they’re just arrangements that most people already use in their day-to-day finances.
While there are different types of trusts, they all work similarly. The grantor establishes the trust and specifies how the assets in the trust should be managed and transferred to the beneficiaries at their death.
The grantor will put assets in the trust, which removes the assets from the grantor’s name and estate. In addition, the grantor names a trustee, the person charged with making the day-to-day decisions for the trust, its assets, and its beneficiaries. When the grantor dies, the trustee will direct the distributions of assets held in the trust according to the trust’s terms.
Several types of trusts can be used for estate planning, each with its own set of benefits and limitations. Some common types of trusts include:
A. Revocable Living Trust: This trust allows you to maintain control of your assets during your lifetime and provides flexibility to modify or revoke the trust terms if needed. It also avoids probate, which can be time-consuming and in some instances, costly. However, it may not offer asset protection from creditors. The trust can also be used to provide support for minor children or beneficiaries with special needs.
B. Irrevocable Trust: Unlike a revocable trust, an irrevocable one cannot be modified or revoked once established. It can offer asset protection because the assets are no longer part of your estate if the trust is drafted correctly. However, you give up control over the assets and may have limited access. There are also gift and income tax considerations in transferring assets to such trusts.
C. Testamentary Trust: This trust is created through a will and only takes effect after your passing. It allows you to designate how your assets will be managed and distributed after death. It can be used to provide support for minor children or beneficiaries with special needs. The main limitation is that it goes through probate.
D. Charitable Trust: This type of trust is designed to benefit a charitable organization. It provides tax advantages for the donor and allows for the distribution of assets to the chosen charity. However, the donor may not control how the charity uses the assets.
E. Special Needs Trust: This trust is created to provide for the financial needs of a person with disabilities without jeopardizing their eligibility for government benefits. It allows for the management of assets on behalf of the beneficiary and ensures they receive necessary care and support.
These are just a few examples of the trusts available for estate planning. The right one for you will depend on your specific goals and circumstances. It's essential to consult with an estate planning attorney or financial advisor to determine which trust best suits your needs.
You can create a trust by contracting with an estate planning attorney. For more details on if a trust if right for you and your loved ones, book a consultation call with us. We are happy to discuss your options.
Reference: Fortune (June 9, 2023) “Understanding trusts: An important estate planning tool for everyday Americans.”
Yonkers Office (By Appointment Only)
Garden City Office (By Appointment Only)
