This guide goes through the ins and outs of trusts to help create a better understanding.
What is a Trust?
Like a Will, your Trust allows you to determine how your property is handled and distributed at the time of your death. The Trustee will administer the Trust even if you become incapacitated, provided you make provision for a Successor Trustee. The Trust allows for you to:
-decide who will inherit your assets and, in particular, make specific gifts to the people you want to receive them
-maintain control of your assets
-give away trust assets to reduce your taxable estate
-are not subject to probate and, therefore, do not become public record
-are more difficult to contest than a Will
Trusts do not allow for you to name a guardian of your minor children and will require a Will to appoint a guardian. Assets not transferred to the Trust are subject to probate. Creditors do not have a final cut-off date for claims.
The Difference between a Revocable and an Irrevocable Trust
A revocable trust can be terminated or modified by the donor at any time without the permission of the beneficiary. Since the grantor is acting as a trustee, the trust's value is considered in their personal estate when determining estate taxes. An irrevocable trust, without permission of the beneficiary, may not be canceled or amended by the donor because they have given up ownership of the trust's contents. Irrevocable trusts have many different types, such as bypass trust, special needs trust, irrevocable life insurance trust, and charitable trust, and are used primary for asset protection, charitable estate planning, and estate tax reduction.
Types of Trusts
-Living Trust: a written statement that makes your end of life decisions very clear to your family and all medical providers should you be unable to decide for yourself at that time. If you cannot make health care decisions for yourself, as determined by two health care professionals, and do not have a living trust a health care "surrogate" will be chosen for you and can be a family member or close friend.
-Land Trust: this trust type deals with the bequeathing of a real estate title to the beneficiary of the trust.
-Generation-Skipping Trust: this trust is used when the trustee is one or more generation younger than the donor.
-Constructive Trust: this type of trust is established by the court based on the grantor's information, facts, and circumstances to ensure that no one is being deprived of their rights and belongings.
-Special Needs Trust: this trust is designed to provide income to those with special needs while still allowing them to receive government benefits.
-Medicaid Trust: this irrevocable trust is used to benefit a person that has too much income to receive government aid, but not enough to cover necessary medical bills.
-Spendthrift Trust: this is a type of irrevocable trust where the donor decides how they money will be spent on behalf of the beneficiary and is often used when the grantor does not trust the financial decisions of the trustee.
-Tax By-Pass Trust: this trust type is used to avoid the estate tax when leaving money to a spouse or descendant.
-Grantor Retained Trusts: this trust has three sub-types: annuity gives the trustee a set amount of money at regular intervals; unit which pays the beneficiary a percent of a trust; and income which allows for assets to be placed in the trust without the grantor giving up the income.
-Qualified Personal Residence Trust: this is similar to a Grantor Retained Income Trust where property can be placed in a trust to reduce the gift tax without the trustee being in charge of the income.
How to Avoid Probate
Most people attempt to avoid probating for the convenience of the estate executor and because the cases can be costly or drag on for at least a year. Here are some tips on how to avoid probate:
-If you have a joint tenancy with your spouse the assets will automatically stay with them.
-Having a Last Will reduces the need for probating because the beneficiaries can be named within a bank or retirement account that is payable upon death.
-A Revocable Living Trust avoids the probate process by distributing the assets to the trustee.
-Reduce the size of your estate with gifts.
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