What Is a Trust?
A trust is traditionally used for minimizing estate taxes and can offer other benefits as part of a well-crafted estate plan.
A trust is a fiduciary arrangement that allows a person called the “trustee” to hold assets on behalf of one or more “beneficiaries.” There are many options for creating and arranging trusts so that taxes are avoided or minimized and the assets of the trust, called the “corpus” passes to the beneficiaries at an appropriate, designated time.
Benefits of a Trust
Trusts usually avoid probate so your beneficiaries may gain access to trust assets more quickly than they might if those assets were transferred by will. Additionally, if the trust is an irrevocable trust, the corpus of the trust may not be considered part of your taxable estate, saving significantly on taxes and passing more of your wealth to your beneficiaries.
Assets in a trust may also be able to pass outside of probate, saving time, court fees, and potentially reducing estate taxes as well.
Trusts allow you to control of your wealth. You can specify the terms of a trust precisely, controlling when and to whom distributions may be made. You may also, for example, set up a revocable trust so that the trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.
Trusts allow you to protect your legacy. A properly constructed trust can help protect your estate from your heirs’ creditors or from beneficiaries who may not be adept at money management.
Trusts provide more privacy and allow for probate savings. Probate is a matter of public record, so anyone who wants to can simply go to the Courthouse and look at your probate estate and see how much money and what assets you owned and to whom they are passing upon your death. A trust may allow assets to pass outside of probate and remain private. If assets pass outside of probate, then there is a significant savings in terms of fees and taxes associated with the probate process.
Basic Types of Trusts
The following will give you some ideas of the kinds of revocable and irrevocable trusts available.
A-B Trust – A common, yet fairly complex, trust arrangement used in a will or in conjunction with a living trust when a married testator has an estate with a value that exceeds his or her remaining estate tax exemption amount. The purpose of the A-B Trust is to shelter assets from estate tax. A testator creates the “A Trust” for the sole benefit of the surviving spouse for life (sometimes called a “Marital Trust”” or “QTIP Trust”) and a second “B Trust” for the benefit of the testator’s descendants or the testator’s surviving spouse and descendants for life (sometimes called the “Credit Shelter Trust” or “Family Trust”).
Charitable remainder trust – Used to create an income stream for a specified period of time with the stipulation that the remainder of the trust corpus goes to charity
Generation-skipping trust – Using the generation-skipping tax exemption, permits trust assets to be distributed to grandchildren or later generations without incurring either a generation-skipping tax or estate taxes on the subsequent death of your children.
Grantor Retained Annuity Trust (GRAT) – Irrevocable trust funded by gifts by its grantor; designed to shift future appreciation on quickly appreciating assets to the next generation during the grantor’s lifetime.
Irrevocable life insurance trust (ILIT) – Irrevocable trust designed to exclude life insurance proceeds from the deceased’s taxable estate while providing liquidity to the estate and/or the trusts’ beneficiaries.
Qualified Terminable Interest Property (QTIP) trust – Used to provide income for a surviving spouse. Upon the spouse’s death, the assets then go to additional beneficiaries named by the deceased.
Testamentary trust – Created by a will and generally used to provide for minor children, though it might be appropriately used for other purposes.
Revocable vs. Irrevocable Trusts
A key distinction between the many different types of trusts is whether the trust is revocable or irrevocable.
A Revocable Trust is also known as a living trust. It can help assets pass outside of probate, yet allows you as the “grantor” or “settlor” of the trust to retain control of the assets during your lifetime. It is flexible and can be dissolved or “revoked” at any time, should your circumstances or intentions change. A revocable trust typically becomes irrevocable upon the death of the grantor. You can name yourself trustee (or co-trustee) and retain ownership and control over the trust, its terms and assets during your lifetime, but make provisions for a successor trustee to manage them in the event of your incapacity or death.
Although a revocable trust may help avoid probate, it may still be subject to estate taxes. Depending upon the situation, it may be treated like any other asset your own during your lifetime.
An Irrevocable Trust typically transfers your assets out of your name and control and, therefore, out of your estate and potentially out of the reach of estate taxes and probate, but cannot be altered by you after it has been executed. Therefore, once you establish the trust, you will lose control over the assets and you cannot change any terms or decide to dissolve the trust.
An irrevocable trust is generally preferred over a revocable trust if your primary aim is to reduce the amount subject to estate taxes by effectively removing the trust assets from your estate. Also, since the assets have been transferred to the trust, you are relieved of the tax liability on the income generated by the trust assets (although distributions will typically have income tax consequences). It may also be protected in the event of a legal judgment against you.
Choosing a Trust
Trust law is complicated and varies considerably from state to state. You need experienced legal counsel to prepare appropriate trust documents to protect your assets and see that your beneficiaries are cared for and that your wishes upon death are carried out. At the Allen Law Firm, we have experienced, knowledgeable attorneys who can guide you through every step of the trust process. Asset protection and planning is one of the areas upon which we focus our practice.
Call us today at 513-229-2900 to speak with an experienced attorney about how trusts can help you plan your estate.
Serving Southwest Ohio clients in Cincinnati, Mason, Lebanon, West Chester, Montgomery, Hamilton, Middletown, Batavia, Wilmington and surrounding areas.
Warren County • Butler County • Hamilton County • Clermont County • Clinton County
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