A well-devised estate plan guarantees that an individual’s assets are going to be smoothly passed on to their chosen beneficiaries following that individual passing away. Without an estate plan it can lead to family conflict, high tax burdens, and considerable probate costs. Whereas a straightforward will is a vital element of the estate planning process, complex plans need to also include the utilization of one or more trusts.
This post describes the most general types of trusts, including their defining attributes and advantages.
- Well-devised estate plans involve pairing a straightforward will with a carefully created trust, to guarantee a benefactor’s assets get transferred to their beneficiaries.
- Trusts may be widely defined as “revocable”, meaning they may be altered throughout a grantors living years, and “irrevocable”, meaning they cannot be modified or revoked.
- Trust entities usually pay individual taxes and consequently must get a federal identification number and file a yearly return.
- Trust funds can hold a variety of assets, such as money, real property, stocks and bonds, a business, or a combination of many different types of properties or assets.
- Every family’s dynamic is different, so it’s important the type of trust(s) you choose to care for your loved ones following your passing is appropriately suited to your loved ones’ requirements.
Basic Attributes of Trusts
A trust is an account handled by an individual or organization, for the benefit of another. A trust comprises of the following attributes:
- Grantor: Many times known as a “settlor “or “trustor”, grantor is in reference to the person that created the trust and is legally authorized to transfer property into it.
- Trustee: This is an individual or organization that handles property and/or assets for the benefit of a 3rd party, by briefly holding onto the property, but devoid of getting direct ownership of it. Trustees have the fiduciary obligation to operate in the best interests of the grantor and their beneficiaries and must dependably execute the decrees detailed in the trust documentation. Consequently, it is vitally important to appoint only reliable individuals for this position.
- Beneficiary: This is the individual that benefits from your trust. There may be multiple beneficiaries to the same trust—each of who could be entitled to various amounts of the assets.
- Property: This is in reference to the asset held inside the trust, and could include money, stocks and bonds, real estate, jewelry, vehicles, and artwork. Many times known as the “principal” or the “corpus”, such property is able to be transferred into the trust while the grantor is still living, through a living trust. As an alternative, assets may be transferred into a testamentary trust following the grantor passing away, according to the mandate of a will.
- Revocable trust: This type of trust may be modified as many times as anted or needed, throughout a grantor’s lifetime.
- Irrevocable trust: This type of trust can never be modified, amended, or rescinded.
- Taxes: In general, each trust pays individual taxes, and consequently needs to acquire a federal identification number and file a yearly return. Many living trusts use their grantor’s tax ID number.
General Types of Trusts
Below are the most general types of trusts:
Living trusts are typically created by the grantor, throughout the grantor’s lifetime, through a transfer of property to their trustee. The grantor usually retains the power to modify or revoke the trust. However, following the grantor passing away, the trust becomes irrevocable and can no longer be modified. Using these means, trustees are required follow the rules described in the creation documentation, associated with the distribution of property and the paying of taxes.
Living Trusts Offer the Below Advantages:
- Healthcare/end-of-life stipulations wanted by the grantor
- Safeguarding against debilitation of grantors and beneficiaries
- Voiding or decreasing of probate delays and costs
- An easy sequence of trustees
- Straightforward accessibility to income and capital by beneficiaries
- Privacy throughout situations where the state necessitates the filing of a record of assets
Testamentary trusts, many times referred to as a “trust under will”, is created by a will following the grantor passing away. This type of trust is able to achieve the below estate planning goals:
- Protecting assets for children from a prior marriage
- Safeguarding a spouse’s economic future by offering lifetime income
- Guaranteeing that beneficiaries with special needs are going be taken care of
- Donations to charities
Irrevocable Life Insurance Trust
Irrevocable life insurance trusts (ILIT) are an essential part of an affluent family’s estate plan. The federal government presently provides individuals an $11.7 million estate taxable exemption for the 2021 tax year. However, any part of the estate over that amount could be taxed as high as 45 percent. Therefore, those estates comprising of more than the $11.7 million relevant exclusion, life insurance is able to become a priceless tool in your estate plan. ILITs provide the grantor an adaptable planning technique and a tax savings method by enabling the exemption of life insurance revenue from both the estate of the first spouse to pass away and from the estate of the living spouse.
This type of trust is funded by life insurance policies, in which the trust turns into both the owner and also the beneficiary of the policy. Nevertheless, the grantor’s heirs are able to remain beneficiaries of the trust on its own. For the plan to be genuine, the grantor is required to live 3 years from the time of the policy transference, otherwise the policy revenue is not going to be exempt from the grantor’s estate.
Note* Even though trusts were established to enable IRA beneficiaries to receive the required minimum distribution (RMD) every year from an inherited IRA or 401k, the Secure Act of 2019 stipulates that unmarried IRA beneficiaries are necessitated to take out each of the funds in the IRA or 401(k) at the conclusion of ten years following the passing of the initial account owner.
Charitable Remainder Trust
Charitable remainder trusts (CRT) are a productive estate planning device available to anyone holding appreciated assets on a lower basis, like stocks or real estate. Funding this trust with these assets allows donors to sell the assets devoid of incurring tax on capital gains. Additionally, CRTs are irrevocable, in which means they cannot be altered or concluded without the beneficiary’s consent. The grantor effectively withdraws all of their rights of ownership of the assets and the trust following the creation of its irrevocable position.
Qualified Domestic Trust
This specialized trust allows foreign spouses to benefit from the marital deduction usually afforded to other married spouses. Typically, a surviving spouse is qualified for a 100% marital deduction of all estate taxes that are owed on assets. Meaning the surviving spouse does not have to pays taxes on assets with no restriction. Nevertheless, when the surviving spouse is a non-citizen, the marital deduction is disallowable. The qualified domestic trust compensates for this regulation.
Special Needs Trust
Special needs trusts are a legal arrangement that allows a physically and/or mentally ailing individual, or an individual chronically debilitated, have access to funding without the possibility of losing the benefits offered by public assistance programs. Because public assistance programs set up for individuals with special needs are asserted on specific income and asset limits, capital put into a special needs trust does not impact their qualification for public assistance.
Pareto, C. (2021, September 8). Pick the perfect trust. Investopedia. Retrieved November 3, 2021, from https://www.investopedia.com/articles/pf/08/trust-basics.asp.
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