Tips for Creating a Trust

t is never too early to plan your estate. By starting early, you can designate your beneficiaries and property distribution. As an alternative to a traditional will, a trust offers several benefits that can safeguard your assets, protect your estate from certain taxes and better provide for your beneficiaries. Get educated on trust laws and requirements, and consult a lawyer or professional financial planner to see if a trust is right for you.

Understanding Trusts

A trust is a legal entity used to manage and hold assets, including property and money, for the benefit of one or more beneficiaries. It is a carefully worded, legally enforceable document, written much like a will, that you (the settlor) set up during your lifetime. A trust is supervised by a trustee you name who has to manage your assets properly and per your wishes (e.g., money allocated correctly for your child's education and health care). The advantages of creating a trust include:

• Management protection: A carefully created trust ensures that your assets will be managed properly if you become unable to supervise them yourself.
• Providing for your dependent beneficiaries: A trust can provide for minor children or family members who do not have any financial experience or are incapable of managing inherited assets.
• Asset protection: Assets transferred to a trust are technically no longer included as property owned by the settlor. If you encounter financial difficulties, such as filing forbankruptcy, trust assets usually are off-limits from creditors and others looking for a settlement.
• Tax savings: In certain cases, putting your assets into a trust shields you and your beneficiaries from having to pay extra income taxes, capital-gains taxes and estate taxes on these assets.
• Probate avoidance: With a trust, your property and assets do not have to go through the sometimes lengthy and costly probate process, and they are transferred immediately to your beneficiaries. Avoiding the public procedure of probate also ensures that the trust assets will be kept confidential.

Types of Trusts

There are two basic types of trusts, each of which has several variations.

The first type is the living trust. This is a trust made while the settlor is still alive. Living trusts can be either:

• Revocable: This allows the settlor to make changes to the trust while they are still alive. It is the most popular form of trust because it allows a settlor to revoke and amend the trust while still avoiding probate after they die; or
• Irrevocable: This kind of trust transfers ownership of a settlor's assets to a named trustee, making the trust a separate legal entity from which assets cannot be removed or amendments made. This form of trust often is chosen by settlors with large estates to lower estate taxes and avoid probate.

The second is the after-death or testamentary trust. This is a trust that is enacted after a person's death by their will or living trust. Any assets that the settlor does not transfer to the trust during their lifetime will be subject to probate. A common example of a testamentary trust is when a minor inherits assets that must be managed by a trustee until the child reaches majority.

In addition, there are different variations on these two types of trusts, including:

• Mandatory trust: The trustee is required to distribute any assets to the beneficiary.
• Discretionary trust: The trustee has full discretion over the distribution of the assets.
• Bypass trust: This trust permits a married couple to protect a greater portion of their estate from estate taxes. The first spouse to pass away can leave behind trust assets to be used by the surviving spouse. When the second spouse dies, the trust assets are inherited by their children or other named beneficiaries.
• Charitable trust: This trust permits an estate tax-deductible donation to a named charity after the settlor's death.
• Life-insurance trust: This trust is created to give liquidity to one's estate. The trust owns the settlor's life insurance policy, so any benefits paid upon their death pass directly to their beneficiaries without having to go through probate.
• Spendthrift trust: This trust ensures that the trustee distributes small stipends of money at regular intervals to any named beneficiaries who are too young or incapacitated to manage money properly.
• Education trust: Beneficiaries can only use the money for educational expenses.
• Qualified personal residence trust: An irrevocable trust in which you transfer a house to your heirs but get to live in it for a specified period first.
• Generation-skipping trusts: A trust in which you transfer money to grandchildren or other people who are at least 37.5 years younger than you.

Resources

American Bar Association: www.americanbar.org

©2024 ComPsych ® Corporation. All rights reserved. This information is for educational purposes only. It is always important to consult with the appropriate professional on financial, medical, legal, behavioral or other issues. As you read this information, it is your responsibility to make sure that the facts and ideas apply to your situation.