Even though it can be sensitive and complex, it’s prudent to have a plan for what happens to your assets after you pass. No financial plan is complete without an estate plan, and no estate plan is complete without at least considering whether you need a trust.
Simply put, a trust is a legal document governing your wishes surrounding how and when to pass your assets to children, charities or other beneficiaries. There are different types of trusts that can be included in an estate plan, but all are designed to ensure that you and your loved ones will be cared for—and that your assets will be distributed according to your instructions. (Here is our step-by-step guide for building an estate plan.)
A trust may help your estate plan because it provides clear, legally sound and cost-effective directions for how assets are to be managed and distributed. It indicates who your beneficiaries are, when they receive funds, and how they can use them. Certain trusts are also used to minimize taxes, protect your legacy and maintain your privacy.
The Two Categories: Revocable vs. Irrevocable Trusts
While there are many types of trusts, they fall into two main categories: Revocable or Irrevocable Trusts.
A trust that can be changed, updated and even revoked is known as a revocable trust. One that cannot be modified as such is known as irrevocable.
As their name suggests, revocable trusts are flexible and can be dissolved at any time. You can name yourself trustee (or co-trustee), allowing you to retain ownership and control of the trust during your lifetime.
Revocable trusts are a popular estate planning tool that can be set up relatively early in life, which makes their flexibility all the more attractive. As circumstances change, so too can the trust.
When you pass away, a revocable trust will automatically become an irrevocable trust.
Irrevocable trusts cannot be altered by the grantor after they’re executed. They’re proverbially “set in stone.”
While establishing and executing an irrevocable trust is a decision that cannot be undone, it comes with certain tax benefits and better asset protection than a revocable trust.
Both are important tools in an estate plan and can be used in conjunction with a will to protect and distribute your assets.
A Variety of Trusts To Choose From
Thorough estate plans may make use of a variety of trust types, which include both revocable and irrevocable trusts. A financial advisor and estate attorney can help you decide which trust type best fits your situation and objectives.
There are several different types of trusts, including:
- A Marital, or “A” Trust, is designed to provide benefits to a surviving spouse. It is typically included in the taxable estate of the surviving spouse.
- A “B” Trust, often used with a marital trust, is sometimes known as a Credit Shelter Trust. It is primarily designed to make full use of any federal estate tax exemptions for each spouse and is an example of an irrevocable trust.
- A Qualified Terminable Interest Property (QTIP) Trust is used to provide income for a surviving spouse. Upon that individual’s death, the trust property goes to additional beneficiaries named by the deceased. It’s typically used in second marriage situations, and as a way to maximize tax benefits and flexibility.
- A Charitable Remainder Trust pays out income to a designated beneficiary, which could also include the grantor, either for life or a period of years. Additionally, it may reduce certain taxes. Upon the death of the final income beneficiary (or at the end of the term), a charity receives the remaining trust property.
- A Charitable Lead Trust initially provides benefits to a charity, with the remainder of the trust property distributed to beneficiaries.
- An Irrevocable Life Insurance Trust (ILIT) is an example of how an irrevocable trust can be used in your estate plan. It is designed to exclude life insurance proceeds from the deceased’s taxable estate and must be irrevocable to receive tax benefits. It can provide liquidity for estate taxes or other needs.
- A Dynasty Trust provides benefits to the grantor’s children and grandchildren, avoiding estate taxes being levied against the estates of your descendants. It is often used by individuals to preserve wealth.
- Other types of trusts include Special Needs Trusts, Testamentary Trusts and Generation-skipping Trusts.
Additionally, state laws vary significantly in the area of trusts. They should be considered, because they can have a major impact on the outcomes of the trust you’re designing.
Building A Trust With Someone You Trust
Establishing a trust is a crucial component of estate planning, but it’s not the most intuitive. Without the guidance of a professional, it’s easy to leave the door open for inadvertent mistakes or omissions. That’s why it’s important to coordinate your plan with a financial advisor and estate attorney.
At Odyssey Group, our advisors work alongside our clients’ attorneys to design and build estate plans that will stand the test of time—regardless of the size of the plan. To find out how we can help you work toward the right estate plan for your situation, reach out to our team today.