When planning for the future, many people consider establishing a trust. A trust is a fiduciary relationship where one person (the trustor) gives their property to someone else to hold in trust (the trustee). The trustee becomes responsible for saving, investing, and spending the property in the trust for the benefit of a third party (the beneficiary). The kinds of property that can be put into a trust include real estate, stocks, savings accounts, and even life insurance policies. There are many kinds of trusts to choose from that can all meet different needs. A lawyer will give you further information.
Revocable vs Irrevocable Trusts
A revocable trust can be revoked or modified at any time by the person who made the trust. Alternately, an irrevocable trust can only be modified in very limited situations. When someone puts their property into a revocable trust, they keep more control over how it’s used. When someone puts their property into an irrevocable trust, they lose some control over it, but can better protect the trust property from creditors.
Living vs Testamentary Trusts
Living trusts take effect during the trustor’s lifetime, while testamentary trusts take effect after the trustor’s death. Living trusts let the beneficiaries enjoy the property immediately and will keep the assets from going through probate. A testamentary trust can be a more private way of giving property away than in a will.
Marital Trust & Tax Bypass Trust
In a marital trust, a married couple places property into a trust and names the surviving spouse as the beneficiary. When one spouse dies, the other will inherit the property, like they would if the property had been left to them in a will. However, unlike with a will, the property inherited by a marital trust is not subject to an estate tax. A tax bypass trust takes a marital trust one step further – after the surviving spouse also passes away, it allows the couple’s children to inherit the property, again without paying an estate tax.
A generation-skipping trust allows a grandparent to leave property directly to their grandchildren, or someone at least 37 ½ years younger than the trustor, “skipping” their children. This means that the trust property will avoid the estate taxes that would apply if the children inherited it directly. With a generation-skipping trust, the children who were skipped can still receive the income generated by the trust property.
Special Needs Trust
A special needs trust is a trust specifically designed for people with mental or physical disabilities. The beneficiary is able to receive income from the special needs trust but the trust property will not count against the their eligibility for federal aid programs, such as SSI and Medicaid. This allows a trustor to help provide for a disabled beneficiary without risking their eligibility to claim federal aid.
Charitable Remainder Trust
In charitable remainder trusts, the beneficiaries receive the income from the trust for a specified period of time, often the life of the trustor, and then the remaining trust property is given to the designated charity. Charitable trusts are a way to reduce trustors’ taxable income and they receive a tax deduction for the property they put into the trust. Additionally, when a trustor puts property into a charitable remainder trust, the trustee can sell and reinvest the proceeds without paying any capital gains tax.
If you are planning your estate and would like to learn more about trusts, please contact Kirker|Davis today.