Contrary to popular belief, trusts aren't solely for the extremely wealthy. A trust can help create a coordinated and potentially tax-friendly method for passing on wealth regardless of one's financial position.
In this arrangement, you select a trustee to hold, manage, and distribute assets for the benefit of one or more beneficiaries. There are numerous ways to set up trusts, and they can stipulate the precise timing and distribution of the assets to the beneficiaries.
But why go through all the time, money, and effort when you could leave everything in a will?
Your beneficiaries might have quicker access to the assets because trusts typically avoid probate court. Also, if the trust is irrevocable, it might not be considered a component of your taxable estate, potentially resulting in lower estate taxes.
You can learn more about what type of trust is best for you and your unique needs by discussing them with a financial expert.
So how could a trust benefit your family?
Why Trusts Are Useful For So Many Families
Trusts are useful for many families, even if they don't involve a lot of money. They offer a way to manage assets with some flexibility. They also provide more control, which is essential when you have young children or grandchildren who may not be ready or able to manage their entire inheritance immediately.
If set up correctly, trusts can also help avoid probate. That's because assets can pass directly from one person to another without going through the court system. This is important because it takes less time to distribute the money and affords the family a measure of privacy.
While There Are Many Types Of Trusts, They All Share Key Points:
Every trust has three parties: grantor, trustee, and beneficiary.
- Trustees are typically named in the trust document and may include family members or professionals such as attorneys or financial advisors.
- The grantor is the person who creates the trust.
- Beneficiaries are people who will receive distributions from the trust over time or after certain conditions are met (for example, reaching a certain age). You can also select charities as beneficiaries, extending your charitable legacy into your estate plan.
Trusts allow you to set boundaries and parameters for the wealth transfer process. Instead of your three children inheriting $100,000 outright, you may spread the distributions over several years or after they meet specific criteria, such as reaching a certain age.
Trusts are great for structure, giving you more control and promoting good stewardship of your assets.
Trusts Tend To Avoid Probate
Trusts tend to avoid probate, the legal process of distributing your estate upon your passing. If there's no will in place, a court-appointed administrator oversees this process. Without a will, probate can take months or even years, depending on the state and circumstances.
Trusts also offer tax benefits and creditor protection. If you put money into a trust for your child, you avoid paying gift taxes on it— up to the limit of $16,000 per year for 2022 ($17,000 in 2023) or double that if you’re married. This can be useful if you're trying to save money for your child's education or other expenses (wedding, etc) without paying taxes immediately.
Similarly, if your child owes money— say for medical bills—creditors cannot go after assets held in trust until they turn 18 or 21 (depending on the state).
Two General Types of Trusts
A revocable trust is a legal entity you create to manage your finances, property, and other assets. You can change the terms of the trust easily as your circumstances change, like if you have a new grandchild or you want to include your best friend or charity in your estate. It's also not as complicated to set up as an irrevocable trust.
An irrevocable trust (usually) cannot change once created. For example, if you want to give money to your kids or grandkids and make sure they'll use it for specific purposes—like paying for college or buying a house—you could set up an irrevocable trust so that the money has to be used for that purpose.
Another benefit is taxes. Since the trust owns the assets, they aren't counted as income or part of your taxable estate.
An irrevocable trust protects assets from probate at death but doesn't allow you to maintain control over those assets while living.
Special needs trusts and charitable trusts tend to be irrevocable. But more on these two in a minute!
Which Type of Trust Is Better For You?
If you're looking for flexibility in your estate plan, a revocable trust is likely the way to go. These trusts are for people who want to protect their assets but also want to be able to change the terms as they see fit.
On the other hand, irrevocable trusts are often for people who don't want their asset plans changed once they're gone—which makes sense if you have specific goals or values that you want upheld after your death.
For example, maybe you want all of your money given away in accordance with certain religious beliefs or wishes; or perhaps you want certain pieces of property used for a specific purpose (like education). Irrevocable trusts can be changed only by court order or the probate court itself.
Trusts For Charitable Giving
Many of our clients are interested in extending their charitable giving into their legacy plan.
One way to do that is to establish a trust designed to support charitable causes. Two common ones are a charitable remainder trust and a charitable lead trust.
A charitable remainder trust allows you to make a gift during your lifetime or through your will and receive an income tax deduction for the estimated value of the gift. In addition, when the trust terminates after a set period of time (the "term"), the remaining assets in the trust transfer to the charity.
A charitable lead trust allows you to make a gift during your lifetime or through your will and receives an income tax deduction for the estimated value of the gift. In addition, when the charity sells the income-producing property, any income not needed to pay expenses transfers to you or other beneficiaries named in your will.
The planning process begins with determining which type of trust makes sense based on your goals and circumstances. It also includes deciding how much money should go into every kind of trust, how long they will last, and the beneficiaries of each type of trust.
A Special Needs Trust for Families
If you're looking to care for a child with special needs but don't want income to interfere with government benefits, sheltering the income in a special needs trust can be an excellent move.
A special needs trust is a great way to ensure that your child's government benefits aren't compromised by any income they may earn. This type of trust is especially important if your child has a disability that prevents them from working and earning money outside the home.
A special needs trust is explicitly designed for beneficiaries who have disabilities and need financial assistance. With this type of trust, the money goes into an account specifically for your child's benefit. The money isn't considered part of your estate when put into this type of trust; therefore, it won't be taxed as part of your estate when you die.
Customize Your Estate Plan
The vehicles you need for your estate plan depend on your family, assets, and legacy goals.
Trusts are one tool you can use. There are numerous others that could help! Get in touch with our team today to review your options.