Trusts are estate planning tools that can help you to avoid probate, transfer your assets to your beneficiaries and minimize the estate taxes you might have to pay. They are legal arrangements in which a third party holds your property and assets to benefit one or more people. At Elder Care Direction, we can explain trusts to you so that you can decide whether you might need one. Here is what you should know about trusts.
Why people create trusts
People create trusts for the following reasons:
- To keep assets controlled if you become incompetent
- To save estate taxes
- To avoid probate
If you have substantial assets, you might establish a trust to keep control over them even after your death. There are several types of trusts that can be established, depending on your goals.
How to set up a trust
You can set up a trust with an online legal service or get help from a trust and estate lawyer. If you decide to set up your trust online, it is important to understand that not all online services have your documents reviewed by paralegals. If mistakes are made when creating your trust documents, they may not be considered valid. Creating a trust online is cheaper than working with an attorney. However, when you work with a lawyer to create your trust, you are less likely to make errors. Before you hire an attorney, you should meet with him or her to make certain that he or she is the right lawyer for you.
Four important terms of a trust
There are four terms in trusts that refer to different parties and features of trusts. As the person who creates the trust, you will be known as the grantor. The third party that will hold the assets in the trust is called the trustee. The assets or property that are held in the trust is called the principal. Finally, your beneficiaries are the people who will receive the assets that are held in the trust.
Types of trusts
You can establish trusts to accomplish different goals. There are also trusts that protect specific types of assets. Trusts that immediately become effective upon their creation are called living trusts. Trusts that do not become effective until after you have died are called testamentary trusts and are often contained within wills.
Living trusts may be revocable or irrevocable. Revocable living trusts allow you to maintain your ownership and control of the trust property, and you can modify or terminate the trusts at any time. If you create an irrevocable trust, you give up your control and ownership of the property to the trust and no longer own it. You cannot make changes to an irrevocable trust.
How trusts are funded
Testamentary trusts are funded after your death according to your will. Revocable living trusts allow you to move assets in and out as you wish. Irrevocable trusts are funded by you transferring the titles or deeds to the trust.
Revocable vs. irrevocable trusts
Irrevocable trusts are chosen to avoid high estate taxes because you don’t have to pay taxes on irrevocable trusts. If you instead want to maintain control of your assets if you become incompetent, a revocable trust might be a better option. For more information about which type to choose, you might want to consult with an estate lawyer.
You are considered to be the owner of property held in revocable trusts, which means that you can be taxed on it while you are alive. Since you give up your ownership of property that is held in an irrevocable trust, you will not be taxed on it.
If you create a revocable living trust, you are able to serve as the trustee. You can also choose another person or entity to serve as the trustee. The trustee has many responsibilities. He or she must manage, invest, and distribute the property. He or she must also administer the trust, pay taxes, work with beneficiaries, and perform accounting duties.
Trustees must prepare and file trust tax returns and pay any taxes that are owed. They must comply with all applicable laws and keep accurate transaction records. Trustees must also invest the trust assets wisely for the benefit of the beneficiaries. When trustees distribute the assets, they must follow the trusts’ mandates in a timely manner.
It is important to name successor trustees if the primary trustee is unable or unwilling to serve. If you are serving as the trustee, you should name a successor trustee who can assume the responsibilities after you have died.
Appointing professionals as trustees
Some people may not have friends or family members who have the requisite knowledge to handle serving as trustees. They may also simply not have enough time to fulfill the duties. In that case, you can appoint a professional such as an accountant or attorney to serve as a trustee.
Choosing your beneficiaries
You can name anyone you like to be a beneficiary of your trust. You can also choose to set up a charitable trust to benefit your favorite charity or educational institution. The beneficiaries that you choose will depend on your goals. How the assets will be distributed to them will also be up to you.
Contact Elder Care Direction
Trusts can help you to reach your estate goals, but they are not necessary for everyone. To learn more about trusts, wills, and other estate planning documents, contact Elder Care Direction to schedule a consultation.