Planning Your Legacy

Is a Trust Right for You?

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Estate planning often begins with a will. But you can also include a trust or multiple trusts in your planning. A trust is a fund that spells out exactly how and when your assets will be distributed after your death. It can also minimize gift and estate taxes. And like a will, a trust can specify who will care for your minor children after your death.

A trust can be used instead of a will or in combination with a will. Many people assume that trusts are only for wealthy people with sizeable estates. Not so. The flexibility of trusts allows people with varying income levels to use trusts to suit their particular needs.

What is the difference between a trust and a will?

The biggest difference between trusts and wills is that a trust lets your heirs avoid the often time-consuming and expensive legal probate process of transferring your property out of your name and into the name of your beneficiaries. Other than things like retirement plan assets and life insurance policies, which have specific beneficiary designations, everything else in your name will go through probate when you die. This process can take months and cost your estate lots of money.

If you create a trust, the trust transfers ownership of any accounts or other assets in that trust directly to whomever you name the beneficiaries of the trust, making probate unnecessary. This also means your heirs will generally be able to access assets in a trust more quickly than assets transferred through a will.

Unlike a will, which must be filed with your state and becomes open to public inspection, trusts are private. This is important to some people because they don't want their finances to be a matter of public record after they die. A trust can also control the timing of your beneficiaries' inheritance even after you're gone — such as preventing someone from inheriting your property until they reach a certain age, graduate from college or some other stipulation.

Types of trusts

There are two primary types of trusts — living trusts and testamentary trusts.

Testamentary trusts

A testamentary trust is set up in a will and goes into effect after your death.

Living trusts

An intervivos trust — commonly called a “living trust” — is set up while you’re still alive. When setting up your living trust, you need to determine if it will be revocable or irrevocable.

  • Irrevocable living trust: As the name implies, once an irrevocable trust has been created, you can’t revoke the trust and you can’t get the assets back. You’ll name a trustee to manage the trust and the assets you place in trust.

    An irrevocable trust is generally established in place of a revocable trust if your primary aim is to reduce the amount of your assets subject to estate tax. An irrevocable trust may also be used to shield your assets from creditors during your lifetime, which can ensure you have something to leave your loved ones when you die. As a further benefit, you may not have any tax liability on the income generated by the assets in that trust.
     
  • Revocable living trust: With a revocable trust, you’ll set up a trustee or trustees to manage the trust (you can be your own trustee or you can name someone else to this role), and you can manage the assets within the trust yourself during your lifetime. You’ll likely choose a revocable trust over an irrevocable trust if you want maximum flexibility to control your trust as part of your overall assets.

    Most revocable trusts allow you to revoke or amend them at any time. Changes can include changing the trustees, changing the trust’s ultimate beneficiaries, adding or removing property from the trust, or revoking the trust entirely.

    In contrast to irrevocable trusts, revocable trusts give you the flexibility to use the same document to manage your assets, while also protecting those assets should you become ill, disabled or unable to make decisions on your own. Using a revocable trust can help you reduce the need for your loved ones to go through the possibly time-consuming, costly process of establishing a financial guardian or conservator should you become incapacitated, as you will have already made those financial stipulations in your living trust.

    Revocable trusts don’t allow you to avoid income or estate taxes on the assets in the trust, because the assets are still in your control and therefore part of your estate and your income.

Common uses for trusts

Caring for minor children

A trust is commonly established for children whose parents die before their children turn 18. In many instances, the trustee will use the trust to pay for children’s expenses until they turn 18, at which point the children gain control of the trust. However, you can also choose to give the children the money or assets when they graduate from college or reach some other criteria or age.

Special needs trusts

A special needs trust can help you provide for someone with a disability to avoid compromising his or her Medicaid, Social Security and other governmental assistance.

When establishing a special needs trust, you need to keep in mind many complex rules that could have significant financial consequences including disqualification from governmental programs. This type of trust isn’t something you’ll want to set up on your own! Be sure to consult an attorney who has experience with special needs trusts.

Other types of trusts

There are many types of trusts in addition to the ones described in this article. Each type of trust has its own set of advantages and disadvantages. Talk to your estate attorney or financial advisor about trusts that might be right for your specific situation. These could include marital trusts, qualified personal residence trusts, credit shelter trusts, charitable trusts, family trusts, life insurance trusts, generation-skipping trusts (also known as dynasty trusts) and others.

Where can you find help?

Because trusts are complex documents with a wide variety of uses and significant legal and financial implications, it’s essential to consult with an attorney about your specific needs before establishing any type of trust. In addition, state laws regarding trusts vary significantly, so you’ll want to talk to an experienced attorney who is familiar with the laws in your state. You may also want to consult with a financial advisor to help you consider all of the financial consequences and to help you coordinate your probate and non-probate assets.

Because circumstances change, you’ll want to revisit your overall estate plan occasionally along with any trusts to make sure they still meet your needs. Consult your lawyer and your financial planner every couple years to make sure your estate plan, will, and trusts are up-to-date.

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