A trust is an agreement made when a person, referred to as the trustor or grantor, gives a third party, known as the trustee, the authority to hold assets for the trust beneficiaries. The trustee is in charge of the Trust and responsible for executing the Trust’s instructions as per the language in the Trust, explains a recent article from The Skim, “What is a Trust? (Spoiler: They’re Not Just for the Wealthy).”
Some examples of how they are used are: if the grantor doesn’t want beneficiaries to have access to funds until they reach a certain age, the trustee will not distribute anything until the age as directed by the Trust. The funds could also be solely used for the beneficiaries’ health care needs, education, or whatever expense the grantor has named; the trustee decides when the funds should be released.
Trusts are not one-size-fits-all. There are many to choose from. For instance, if you wanted the bulk of your assets to go to your grandchildren, you might use a Generation-Skipping Trust. If your home’s value may skyrocket after you die, you might want to consider a Qualified Personal Residence Trust (QPRT) to reduce taxes.
There are several categories:
Testamentary Trust vs. Living Trust
A testamentary trust is a “under will” created based on provisions in the will after the grantor dies. A testamentary trust fund can be used to make gifts to charities or provide lifetime income for loved ones.
In most cases, they don’t have to go through the probate process, that is, being validated by the court before beneficiaries can receive their inheritance. However, because the testamentary Trust is tied to the will, it is subject to probate. Your heirs may have to wait until the probate process is completed to receive their inheritance. This varies by state, so ask an estate planning attorney.
Living trusts are created while you are living. As the grantor, you may make as many changes as you like to the terms while living. Once you die, they become irrevocable, and the terms cannot be changed. There’s no need for the Trust to go through probate, and beneficiaries receive inheritances per the Trust’s directions.
What are the key benefits? Trust doesn’t always need to go through probate and gives you greater asset control. If you create an irrevocable trust and fund it while living, your assets are removed from your probate estate, which means whatever assets are moved into the Trust are not subject to estate taxes.
Are there any reasons not to create a trust? There are costs associated with creating the document. The Trust must also be funded, meaning ownership documents like titles for a car or deeds for a house have to be revised to place the asset under the control of the Trust. The same applies to stocks, bank accounts, and other assets used to fund the Trust.
Trusts are a valuable tool for gaining more control over your assets, minimizing estate taxes, and making life easier for those you love after you pass. Speak with your estate planning attorney to determine which Trust works best for your situation. Your estate plan and any trusts should complement each other.
Reference: The Skim (Oct. 26, 2022) “What is a Trust? (Spoiler: They’re Not Just for the Wealthy)”