Many of us avoid thinking about what will happen to our worldly possessions once we are gone. However, a trust can be a simple tool for people from all walks of life (from the average person to the very wealthy) to help manage their funds and other assets while they’re alive, and to avoid things like unnecessary taxes, family feuds, or probate after their death. Below is an overview of the types of trusts and their benefits.
What is a Trust?
Trusts are fiduciary arrangements used in estate planning that allow the asset holder (grantor) to control how, when, and to whom distributions of their wealth may be made. Trusts offer a number of benefits, which include allowing a 3rd party (trustee) to hold assets on behalf of beneficiaries, helping beneficiaries avoid probate, minimizing estate taxes, and more.
What is Probate?
Probate is a legal process where courts verify the value of an estate and determine the validity of a will and named beneficiaries. Probate also becomes necessary in cases where no will or trust exists to determine who will legally inherit the assets. The process differs by state and can take months, tying up property and other assets. It also involves attorney and court fees.
Revocable Trusts are also known as “living trusts.” They allow grantors to retain control over their assets while they are alive. Revocable refers to the grantor’s ability to revoke, or dissolve, the trust at any time regardless of the reason. The grantor’s situation or intentions may change, resulting in a desire to remove or to add a designated beneficiary, or to otherwise change the terms. Revocable trusts help beneficiaries avoid probate; however, they may be subject to estate taxes. Typically such trusts become irrevocable upon the grantor’s death.
An irrevocable trust transfers a grantor’s assets out of his/her estate prior to the grantor’s death. Once the trust has been executed, the grantor loses control of the assets and can no longer alter or dissolve the trust. Generally, people choose to go with an irrevocable trust if the goal is to reduce the amount subject to estate taxes.
How to set up a Trust
Under the broader categories of revocable and irrevocable trusts, many types of trusts exist that meet a variety of specific goals or needs. Marital, charitable lead or remainder, or generation-skipping trusts are just a few examples. In addition, trust laws vary by state, so choosing and setting up the right one for you can be a complex process. It is highly recommended that you seek the guidance of an estate planning expert.
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