Estate Planning: What is a Trust?

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A trust is a fiduciary arrangement that allows athird party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. There are various ways to arrange a trust and specify exactly how and when the assets of the trust will pass to the beneficiaries.

One big advantage with trusts is the avoidance of probate, which will allow the beneficiaries to gain access to these assets more quickly than they might had the assets been transferred using a will. There are also significant costs and court fees avoided since the assets do not have to go through probate.

Other benefits of trusts include:

  • 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.
  • Protection of 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.
  • Privacy and probate savings. Probate is a matter of public record; a trust may allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.

 

Basic Types of Trusts:

  • Marital Trust. Designed to provide benefits to a surviving spouse
  • Bypass Trust. Also known as a credit shelter trust, this trust is designed to maximize any federal estate tax exemption for each spouse.
  • Testamentary Trust. This trust is outlined and created in a will, with funds subject to probate and transfer taxes.
  • Irrevocable Life Insurance Trust (ILIT). This trust is designed to exclude life insurance proceeds from the deceased’s taxable estate while providing liquidity to the estate and/or the beneficiaries.
  • Charitable Lead Trust. Allows for certain assets and benefits to go to a charity with the remainder going to the beneficiaries.
  • Charitable Remainder Trust. Designed to provide an income stream for a defined period of time with the remainder going to a charity.
  • Generation-Skipping Trust. Sometimes known as a dynasty trust, this trust permits trust assets to be distributed to grandchildren or later generations, without additional transfer taxes being due on the subsequent death of a child.
  • Qualified Terminable Interest Property Trust (QTIP). Designed to provide income for a surviving spouse, with ultimate beneficiaries receiving the assets of the trust upon the death of that spouse. Often used in second marriage situations, as well as to maximize estate tax exemption.
  • Grantor Retained Annuity Trust (GRAT). Irrevocable trust funded by gifts from its grantor; it is designed to shift future appreciation of appreciating assets to the next generation during the grantor’s lifetime.
  • Qualified Personal Residence Trust. Irrevocable trust designed to hold and own your primary or secondary residence and remove its value from your taxable estate.

 

Revocable vs. Irrevocable

A major distinction between different types of trusts is whether they are revocable or irrevocable.

Revocable trust: Also known as a living trust, a revocable trust can help assets pass outside of probate, yet allows you to retain control of the assets during your (the grantor’s) lifetime. It is flexible and can be dissolved 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 is usually still subject to estate taxes. It also means that during your lifetime, it is treated like any other asset you own.

Irrevocable trust: An irrevocable trust typically transfers your assets out of your (the grantor’s) estate and potentially out of the reach of estate taxes and probate, but cannot be altered by the grantor 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.

 

Deciding on a Trust

Florida laws are very specific as to the formalities involved in creating a trust. Seeking advice from a qualified attorney who can better advice you as to which trust is right for you is important in creating an estate plan tailored to your needs. If you are interested in creating an estate plan that either helps to avoid probate or reduces your ultimate transfer tax liability, call Bauer Law Office P.A. at (305) 712-7979.

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