A trust is a powerful estate planning tool, but how much do you know regarding what a trust can accomplish within an estate plan?
First, to review how a trust works:
A trust is a legal entity that is set up by a “grantor” to hold and manage property for the benefit of beneficiaries named within the trust documents. Nearly any type of property can be owned by a trust, including stock, life insurance policies, cash, real estate and even personal property.
Why would a trust be used in an estate plan? A trust can accomplish several goals for your estate plan, such as:
- Avoiding probate – since the trust legally owns the property rather than the deceased, the property avoids probate and can be transferred much more quickly.
- Allowing confidentiality – since trust property does not need to be probated, there is no public record of the probate court proceeding.
- Retaining control – a trust allows you to retain some control over how assets are managed and distributed after you pass away by appointing other persons or entities to manage the trust when you are no longer alive.
- Managing property in case of incapacitation – a living trust allows you to have a successor trustee who can manage your trust property in the event of your incapacitation.
- Reducing estate taxes – some types of trusts can be formed to reduce the tax burden of an estate.
Many are familiar with a living trust, as they have become heavily advertised over the past decade, but there are several types of trusts:
- Living Trusts – A living trust becomes effective during the grantor’s lifetime and can be used as part of an incapacitation plan to manage your property should you no longer be able to do so on your own. It can also be effective after you pass away.
- Testamentary Trusts – Testamentary trusts are created by a will and they are only formed upon the death of the grantor. They are often used to create a trust for minors to manage property until they reach an age specified within the trust documents.
- Marital Trusts – A marital trust helps married couples minimize estate taxes by ensuring that the estate tax exemption amounts of both spouses are fully used and holds all assets available to the surviving spouse for his or her needs.
To determine if a trust fits into your estate plan, work with an estate planning attorney to ensure that you are using the tools that meet your family’s needs and goals.