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This question is frequently asked, and the answer varies based on your individual circumstances. Various types of trusts are utilized to achieve diverse objectives. If you are concerned about preserving, maintaining, and transferring assets efficiently to your loved ones, you might need a trust.
Examples of How a Trust Can Work for You
- If you have a disabled child, you may want a trust so they can access funds intended to enhance their lifestyle without losing government benefits.
- If you or your spouse have declining health, you may want to restructure assets in a trust to pay for potential long-term care services at home, in assisted living, or a nursing home.
- If you want to leave a legacy to your heirs but aren’t sure your children can manage their funds responsibly, you can control the terms for receiving and spending the money with a trust.
- If you want to avoid an expensive, public, and lengthy probate process, a trust can pass your assets to beneficiaries more quickly after you’re gone.
These are a few excellent reasons to consider a trust. But what kind of trust is best suited to your needs? Contacting an estate planning attorney offers answers. We explain the basic idea behind trusts and discuss your goals, concerns, and family circumstances.
What is a Trust?
In legal terms, a trust is a fiduciary agreement between you, your trustee, and your beneficiary. The trust document contains instructions for what you want done with trust property, how you want it invested, and how you want assets distributed when you pass. Trusts are highly efficient asset-management tools that work with your last will and testament, powers of attorney, living will, advance directives, and more.
Think of a trust like a treasure chest. You originally bought property or earned money in your own name. You can transfer those assets into the trust’s name – into your treasure chest, a separate legal entity where funds are protected and managed.
You are the grantor (settlor or trustmaker). You must appoint a trustee, a person or entity responsible for managing trust assets and following directions contained in the trust document. You decide who you want to receive trust assets (your beneficiaries) and can control when and how it happens. There are two basic kinds of trusts: revocable or irrevocable trusts.
The Revocable Trust
A revocable trust is like a treasure chest with an open lid. As the grantor of a revocable trust, you can transfer trust assets at any time. You may act as the trustee and beneficiary, change the trust terms, or revoke the whole thing.
If you have an accident, become ill, and lose capacity, the terms of your trust will designate a person to step in on your behalf, avoiding the need to go to court to get a guardian for urgent decision-making. The trust also keeps your affairs private outside of probate court. You can also avoid additional probate court costs if you own real property in various states.
The Irrevocable Trust
Think of an irrevocable trust as a treasure chest with a locked lid. Your trustee – not you – is the one with the key. You no longer control your assets. This arrangement is necessary to shelter assets from creditors and lawsuits or to preserve your assets when meeting eligibility requirements for government benefits like Medicaid.
Unlike a revocable trust, once an irrevocable trust is established, you can’t directly alter the terms, and access to trust money is restricted or entirely precluded to enjoy the potential benefits.
An irrevocable trust must be drafted carefully to let you control how assets are used. You create the terms and conditions that must be met before a beneficiary can receive funds and can designate how income is used for specific purposes like college tuition, business start-up, or travel. By authorizing a person or entity as a trust protector, they can alter trust language, correct drafting errors, or create a new similar trust if laws change.
Some sophisticated trusts offer tax benefits. For the most part, the IRS considers revocable trusts to be invisible. You will pay tax on the revocable trust income at your individual rate and not the trust rate.
As for estate taxes, trusts have no effect. And most people remain unaffected by federal estate taxes due to the size of their estate. They are not incurred until the value exceeds $12.9 million as of 2023. Check to see if your state imposes estate and inheritance taxes.
Revocable trusts provide no protection against creditors. If you lose a legal action, a judge can force you to change the beneficiary of your trust to the winner. Irrevocable trusts eliminate this problem.
However, irrevocable trusts must be established long before you run into legal trouble. If you create a trust while credit problems are looming or have already arrived, it can be undone due to fraudulent conveyance.
This article offers a summary of aspects of estate planning. It is not legal advice and does not create an attorney-client relationship. For assistance, please contact our Forty Fort office or call (570) 288-1800.