If you establish an estate plan, you may feel confident that your wishes will be followed during your life and after you pass way when it comes to your assets. While most people think that wills are the cornerstone of their estate plans, they can be contested and may have to go through the probate process. Some people recognize this and establish trusts to manage and transfer their assets after they die. There are several types of trusts. The professionals at Elder Care Direction can help you to understand the different types of trusts and how they might help you to accomplish your goals.
Understanding trusts
Trusts are legal agreements that are established by two parties, including the trustor who establishes the trust and the trustee who will manage it. In many cases, the trustor and the trustee will be the same person until the trustor dies. Then, a successor trustee may step into the role.
Like wills, trusts can have designated beneficiaries. The beneficiaries of a trust may be anyone that you choose. A trust beneficiary can also be a charitable organization. Beneficiaries are the people or entities that are entitled to receive assets from the trust, according to your wishes. You can transfer multiple asset classes to a trust, including the following:
- Real estate, including land, investment properties, and homes
- Your deposit accounts
- Stocks, money market accounts, and bonds
- Life insurance policies
- Collectibles
- Business assets and interests
When you transfer assets to your trust, you fund it.
What Are the Advantages of Trusts?
Trusts offer multiple benefits. They can help you to pass your assets to your beneficiaries without having to go through probate. You can also use a trust to manage your business and personal assets if you become incapacitated. A trust can be established to provide for the needs of a dependent who has special needs. You can also establish a trust to outline rules for when your beneficiaries will receive their inheritances. Trusts can be used to preserve your assets to care for your minor children if you die. Finally, a trust might help you to reduce or avoid the estate and gift taxes that might otherwise have to be paid after you die.
What Are Revocable vs. Irrevocable Trusts?
Trusts fall into two broad categories, including revocable and irrevocable trusts. Revocable trusts are trusts that you create during your lifetime that allow you to retain control over your assets. You can make changes to a revocable trust at any time, and you also have the power to terminate it whenever you want. After you die, a revocable trust will become irrevocable.
An irrevocable trust is a type of trust that you can create. Once you create an irrevocable trust, it takes over the control and ownership of the assets that you place in it. You will not have the right to make changes to an irrevocable trust or to terminate it. Irrevocable trusts help to keep your assets safe from the reach of creditors and may offer some tax benefits that you can’t receive from a revocable trust. Both types of trusts allow you to pass your assets outside of the probate process. While revocable trusts have greater flexibility, irrevocable trusts help to keep your assets out of the reach of creditors. They can also help to remove assets from your estate to help you to avoid estate and gift taxes.
Special Types of Trusts
There are numerous special types of trusts that you can use in your estate plan. The type of trust that you choose will depend on what goals you are trying to accomplish.
Marital Trusts
Marital trusts are trusts that are established by a spouse to benefit his or her spouse. When you pass away, the assets in your marital trust are passed to your surviving spouse. This allows a spouse who survives you to avoid paying estate taxes on your assets while they are alive. When your surviving spouse dies, his or her heirs will have to pay estate taxes on the remaining trust assets when they receive them.
Credit Shelter Trusts
Credit shelter trusts may be established by married couples to reduce the estate taxes that their heirs might have to pay. These are irrevocable trusts that transfer assets directly from one spouse to the other when the first spouse dies. Instead of the spouse directly holding the assets, they will be managed by the trustee. This allows the assets to be excluded from the surviving spouse’s estate. When he or she dies, the remainder goes to the beneficiaries without estate taxes being assessed.
Charitable Trusts
Charitable trusts allow you to give to your favorite charities through your estate plan. You can create either a charitable remainder trust or a charitable lead trust. Charitable lead trusts allow the trustors to earmark specific assets for a charity. The rest of the assets will be passed to the beneficiaries upon the trustor’s death. A charitable remainder trust allows you to receive income from the trust assets for a specific time period. Any remaining income or assets will then go to a designated charity.
Generation-Skipping Trust
Some people want to transfer their assets to their grandchildren instead of their children. To do this, you can establish a generation-skipping trust. This allows you to pass your assets to your grandchildren. You can still let your children have access to the income that is generated by the assets.
Irrevocable Life Insurance Trust
An irrevocable life insurance trust is a trust that holds the proceeds of your life insurance policies. You can designate your ILIT as the beneficiary of your policies. You can also have the ILIT purchase life insurance policies on your behalf. This type of trust can keep the proceeds of your policies out of your estate’s value for estate tax purposes.
Special Needs Trusts
Special needs trusts are special types of trust accounts that are designed to help to provide for dependents who have special needs. This allows you to provide financial support for your loved one without impacting his or her ability to receive disability benefits from the government.
Spendthrift Trusts
Spendthrift trusts are trusts that you can establish when you have an heir who does not make good financial decisions. This allows you to establish rules about when and how much the trust assets can be accessed so that your heir does not misuse them. A spendthrift trust might also keep the assets out of the reach of your loved one’s creditors.
Testamentary Trusts
Testamentary trusts are established by wills. They do not come into existence until you die. They are irrevocable. The main purpose of a testamentary trust is to make certain that your beneficiaries will only be able to access the assets at a time that you have determined.
Totten Trusts
Totten trusts allow you to deposit money into a bank account. After you die, the money will then be passed onto the beneficiary that you have designated to receive the balance.
Contact Elder Care Direction
You might want to get help if you are uncertain whether you need a trust as a part of your estate plan. The professionals at Elder Care Direction can talk to you about your estate and help you to determine whether a trust might be appropriate for you. Contact us today to schedule a consultation by filling out our online contact form.
