A trust is a document that specifies how you want your property handled after you pass away. Setting up a trust allows you to ensure that your beneficiaries responsibly handle their inheritance by setting up guidelines. In a trust, you have the power to determine what conditions must be met by your beneficiaries before they receive any funds. Another reason for setting up a trust is to avoid paying estate taxes or to bypass probate.
A trust typically involves three different parties:
This is the individual who establishes the trust, donates the assets (whether it be property, cash, or any other assets), and establishes the terms which the trust must follow.
This is the individual(s) receiving the inheritance. The grantor decides how the assets contained in the trust are managed to the benefit of the beneficiary.
The trustee is the individual or institution appointed by the grantor to oversee the trust. It is their responsibility to ensure that the grantor’s wishes are followed and that the trust is held in good condition for the beneficiary.
Categories of Trusts
While a wide variety of types of trusts exist, they all fall within two major categories:
A revocable trust, or living trust, allows the grantor to maintain control over the assets during his or her lifetime. Designed to help bypass probate, it is subject to estate taxes and is considered an asset of the grantor, similar to any other assets owned. A revocable trust provides flexibility and can be dissolved at any time. It typically becomes irrevocable after the death of the grantor.
An irrevocable trust moves the assets out of the grantor’s estate. This typically results in avoiding paying estate fees and bypassing probate. However, an irrevocable trust is just that, irrevocable. Once it is put in place, it cannot be dissolved. The grantor no longer has control over the assets as control is given to a trustee.
Types of Trusts
Marital or “A” Trust
Designed to provide benefits to the surviving spouse and is typically included in his or her taxable estate.
Bypass or “B” Trust/Credit Shelter Trust
Designed to bypass the estate of the surviving spouse to take advantage of any available federal estate tax exemptions
Designed to be created after death as described in the will, subject to probate and transfer taxes
Irrevocable Life Insurance Trust
Designed to exclude life insurance proceeds from the taxable estate of the deceased and provide liquidity to the estate and beneficiaries
Charitable Lead Trust
Designed to provide benefits to a charity, with the remainder given to beneficiaries
Charitable Remainder Trust
Designed to provide you with an income for a set period with the remainder going to a charity
Designed to take advantage of the generation-skipping tax exemption and provide assets for grandchildren and later generations
Qualified Terminable Interest Property Trust
Designed to provide income for the surviving spouse until their death, at which time the remaining assets go to the beneficiaries named by the grantor.
Grantor Retained Annuity Trust
Designed to transfer future appreciation on fast appreciating assets to the children during the grantor’s lifetime
Benefits of Setting up a Trust
Control Your Wealth
The grantor can specify the terms of the trust including who the beneficiaries will be and conditions the beneficiaries must meet before they are granted their inheritance. This gains importance when you have children who are underage or beneficiaries you feel are not fiscally responsible enough to use their inheritance wisely.
Protect Your Legacy
A trust provides the opportunity for you to provide for future generations, ensuring that your legacy lives on indefinitely. It also protects your estate from your heir’s creditors.
Privacy and Cost Savings
A trust allows the asset inheritance to bypass probate, which go on public record. It also results in lower taxes and fees incurred in the process.
Purposes for Setting up a Trust
It allows the grantor to protect their assets from financially irresponsible beneficiaries or their families. It also puts the control of your assets in the hand of a trustee, an individual you trust to make sound decisions.
A trust provides savings in many areas, including estate taxes, probate costs, and others.
Provide Educational Support
A trust allows you to ensure that assets are available in the future when your children, your grandchildren, or even your great-grandchildren are ready to start post-secondary education. You gain the peace of mind in knowing that future generations will be able to afford to attend school and gain an education.
With a trust, you have the ability to determine how your assets are handled in the future. If you want a cherished piece of property to remain in the family, then placing it in a trust ensures that future generations cannot sell it off. You also have the ability to protect employees or other individuals you want to make sure are protected after you pass away.
While a trust has typically been thought of as a possibility for only the rich, this is not the case. You definitely do not have to be rich to set up a trust; you just need to have the desire to fulfill one of the objectives listed above.