How a Trust Can Help Your Estate Plan
Posted on April 11, 2023 in estate planning,trust
Estate planning is the organization and management of your lifetime assets. It involves deciding how your wealth and property will be distributed to your beneficiaries. One legal tool that has gained popularity in recent years for its flexibility and utility in estate planning is establishing a trust. Trusts offer several benefits that can help you manage your assets more effectively, safeguard your wealth, and ensure your loved ones are cared for after passing.
What Is a Trust?
A trust is an official legal arrangement that allows one person, known as the trustee, to hold and manage assets on behalf of another person or a group of people, called beneficiaries. The person who originally creates the trust is called the settlor or grantor.
Trusts can be created during the settlor’s lifetime (inter vivos or living trust) or after their death through their will (testamentary trust). They can be revocable, meaning the settlor can change or terminate the trust during their lifetime, or irrevocable, meaning the trust cannot be altered or terminated without the beneficiaries’ consent.
Benefits of a Trust in Estate Planning
There are several benefits of having a trust as part of your estate plan:
- Avoid probate. When a person dies, their assets must go through the legal process known as probate before they can be distributed to their heirs. Probate can be time-consuming, costly, and public. Placing your assets in a trust can bypass the probate process, saving your beneficiaries time and money and preserving their privacy.
- Control over asset distribution. A trust allows you to establish specific terms and conditions for distributing your assets to your beneficiaries. You can decide when and under what circumstances they will receive their inheritance. This can be of particular value if you have minor children or beneficiaries with special needs.
- Asset protection. Trusts can offer protection against creditors and lawsuits, safeguarding your assets for your beneficiaries. By placing assets in a sealed irrevocable trust, you effectively remove them from your personal ownership, making them inaccessible to creditors and legal judgments.
- Tax benefits. Trusts can provide significant tax benefits, depending on the type of trust you create. For instance, an irrevocable life insurance trust (ILIT) can help minimize estate taxes by removing the proceeds of a life insurance policy from your taxable estate.
- Management of assets. A trust allows you to appoint a trustee to manage your assets, ensuring they are well-maintained and invested according to your wishes. This can be particularly helpful if you become incapacitated or unable to manage your own affairs.
Kinds of Trusts
The different trusts you can choose from include:
- Revocable living trust. A revocable living trust is a trust created during the settlor’s lifetime and can be changed or terminated at any time. It allows the settlor to retain control over their assets and avoid probate. However, it does not provide the same asset protection or tax benefits as an irrevocable trust.
- Irrevocable trust. This trust cannot be altered or terminated without the beneficiaries’ consent. It offers greater asset protection and tax benefits than a revocable trust, but it does not allow the settlor to retain control over its assets.
- Testamentary trust. A testamentary trust is created through the settlor’s will and becomes effective upon their death. It allows the settlor to control the distribution of their assets after their death but does not avoid probate.
- Special needs trust. A special needs trust provides financial support for a beneficiary with a disability without changing their eligibility for government assistance programs like Medicaid or Supplemental Security Income (SSI). This type of trust ensures the beneficiary’s needs are met while preserving their access to essential public benefits.
- Spendthrift trust. A spendthrift trust is a trust that includes specific provisions to protect the trust’s assets from the beneficiary’s creditors or from being squandered due to the beneficiary’s financial irresponsibility. This type of trust can be useful if you have concerns about a beneficiary’s ability to manage their inheritance.
Q: What Is the Most Suitable Trust for Estate Planning?
A: The most suitable trust for estate planning depends on the individual’s specific needs and objectives. A revocable living trust is often recommended for its flexibility, allowing the settlor to retain control over their assets and make changes or terminate the trust as needed. However, irrevocable trusts may be more appropriate for those seeking greater asset protection and tax benefits.
Q: What Are the Disadvantages of Putting Your House in a Trust?
A: While placing your house in a trust has several advantages, there are also some potential drawbacks to consider. For instance, transferring your house into an irrevocable trust means you no longer have direct control over the property, which may be undesirable for some homeowners. Establishing and maintaining a trust can involve legal fees and administrative costs. Lastly, placing your home in a trust may impact your eligibility for certain property tax exemptions or mortgage-related benefits.
Q: How Does a Trust Impact Taxes in Estate Planning?
A: A trust can impact taxes in estate planning in various ways, depending on the type of trust used. For example, an irrevocable trust can provide estate tax benefits by removing assets from the settlor’s taxable estate, potentially reducing the overall estate tax liability. Additionally, some trusts, like charitable remainder trusts and charitable lead trusts, can offer income tax benefits for the settlor or beneficiaries.
Q: How Do I Choose the Right Trustee for My Trust?
A: Selecting the right trustee for your trust is a critical decision. The trustee is responsible for managing the trust’s assets and ensuring the assets are distributed according to the trust’s terms. When choosing a trustee, consider trustworthiness, financial responsibility, and familiarity with your wishes and values. Many people choose a trusted family member or friend, while others opt for a professional trustee or financial institution to provide an unbiased, experienced perspective.
Contact Ken R. Ashworth & Associates Today
If you need assistance setting up or managing a trust, the legal professionals at Ken R. Ashworth & Associates can help. We have decades of experience helping clients with their estate planning needs. Contact a Vegas estate planning attorney today to schedule a consultation.