Trusts are used to safeguard estate assets and reduce estate and inheritance taxes. Most people find the process somewhat confusing because there are different kinds of trusts and methods for setting them up. Some of the most common include: revocable, irrevocable, living, and testamentary trusts.
Essentially, trusts are used to secure property that is intended to benefit other people. While there are many kinds of trusts, each includes similar elements. Each involves the person creating the trust, the person managing the trust, and the people that benefit from the trust.
The individual that sets up the trust and is the owner of estate possessions is known as the Trustor. This person is also referenced by different names such as Donor, Settler, and Grantor. These terms vary by location, but always refer to the person making the trust.
The person or entity appointed to manage a trust is called the Trustee. Trustees can be a relative or friend, or a corporation, law firm, bank, or investment firm. Trustees are responsible for managing the trust and maintaining control over estate property that is transferred to it.
Trusts are funded with cash and property. Part of the funds can be used for personal expenses or investing purposes. If dividends or interest is earned on investments the money can be put back into the trust fund and used for future financial investments.
The people or entities designated to receive estate assets upon death are known as the beneficiaries. Trustors can gift property to whomever they desire. Beneficiaries can include relatives, friends, business associates, charitable organizations, religious groups, and educational institutions.
While there are dozens of different types of trusts, they all fall into one of three categories. The first is either living or testamentary. Living means that the trust is arranged while the Trustor is still alive. Testamentary means the trust becomes effective after the Trustor passes away.
Property placed into living trusts can avoid probate as long as the trust is structured properly. Property that transfers into a testamentary trust is still subject to probate. Living trusts remain private, while testamentary trusts become a matter of public record.
The second category is revocable vs irrevocable trusts. When Trustors establish a revocable trust they can make changes at any time. When the trust is irrevocable Trustors are not allowed to make changes or amendments, nor terminate the trust once it is arranged.
The final category is based on the purpose of the trust. Some trusts are used to protect assets. Others are used to shelter estate assets from federal estate taxes. Some are intended to lessen taxes for heirs, while others are used to provide monetary gifts to charitable organizations.
Trustors will also need to think about the type of property placed into trusts. Titled property, such as real estate, needs to be transferred to the trust by filling out necessary forms. While it is usually beneficial to transfer real property to a living trust, there are times when it is more efficient to prepare a deed that transfers the realty to beneficiaries upon death.
Small business assets can be transferred to trusts, but the method varies dependent on if the company is a sole proprietorship, partnership, corporations, or LLC.
Stocks, bonds, and mutual funds can be placed into a living trust, but can also be gifted to beneficiaries by filling out transfer-on-death forms. Account owners can gift investment proceeds to one or more beneficiaries that allow them to transfer the funds into a new account or accept lump sum cash.
Types of property that cannot be placed into trusts include cash, life insurance policies, and individual retirement accounts. Vehicles can be transferred, but it’s not always the best approach. Instead, owners can set up a transfer-on-death title if they reside in a state that allows this, or set up joint ownership with the right of survivorship.
While many people establish trusts for the main goal of avoiding probate, there might not be a need for one at all. It’s always best to talk with an estate attorney to figure out which estate planning methods offer the highest level of protection.
At Craton, Switzer and Tokar we specialize in helping people establish estate planning strategies to avoid probate and minimize estate and inheritance taxes. We encourage you to call us to schedule a consultation or learn more about probate and trusts in our estate planning article library.