18 September 2019

Trusts can benefit someone you choose or your own estate.

Creating one or more trusts can give you the opportunity to control what happens to your assets after your death. A trust is a legal entity, sometimes compared to a corporation, to which you can transfer property.

Different trusts serve different purposes, so you may not be able to find one trust to meet all your goals. However, you can create several trusts to serve different purposes. For example, you may be able to reduce the value of your taxable estate by putting some assets into a trust. Or you may be able to set up the schedule on which your heirs would have access to some of your assets.

The basics

Most trusts work the same way: You, as the donor, establish the trust, and place assets in it. The trust is then run by the trustee whom you name, and will eventually benefit the beneficiary or beneficiaries — the person, people, or organizations that are to receive income and perhaps the principal from the trust. For example, an elderly woman may set up a trust, managed by her financial planner, to support her granddaughters while the young women are in college.

Living trusts

If you choose to create a trust that you fund during your lifetime, the trust is called a living trust or an inter vivos trust. You must decide whether the trust is revocable or irrevocable.

A revocable trust is similar to a will. You can change what’s in it and who benefits from it whenever you choose, and its value is counted in your estate at your death. But unlike a will, the assets in a trust do not go through the extensive and public process of probate.

An irrevocable trust is a binding arrangement. You can’t change any of its terms or reclaim an item once you transfer it to the trust. Despite such restrictions, you may want to create an irrevocable trust if your goal is to reduce estate taxes.

To use an irrevocable trust to shield your estate from taxes, you may choose to keep your annual contributions under the tax-free gift limits. Or you can set up the trust using Crummey powers. That means the beneficiaries must be notified that they have the right to withdraw an asset within a set amount of time after you contribute it. But it gives you the opportunity, over time, to shed a lot of your estate value by passing it through the trust to the people you want to benefit.

Life insurance trusts

If you own the insurance policy on your own life, the benefit paid at your death is counted in your estate. Since that can be a sizable asset, you can reduce the risk of estate taxes by setting up a life insurance trust expressly designed to own the policy on your life.

Charitable living trusts

If you plan a gift to charity from your estate, you might want to create a trust that makes those donations during your lifetime instead.

If you set up a charitable remainder trust, you can choose to donate tax-deductible assets and collect income from the trust for your lifetime or an agreed-upon period. When you die, the trust’s remaining assets go to the charity.

With a charitable lead trust, on the other hand, the assets in the trust pay income to the charity for a specified period of time. When the period ends, your beneficiaries inherit the assets.

A charitable gift annuity is a simpler version of a charitable trust. You make a gift directly to a charity, and in turn they pay you — and a beneficiary you name — a set income for the rest of your life.

Marital trust

If you’re married, you may create a marital trust. If either of you dies, this trust manages the surviving spouse’s finances to help minimize financial decisions. However, you and your spouse may both feel qualified to handle your own finances and decide against a trust.

Other trusts

Testamentary trusts are created by your will at the time of your death, often to minimize estate taxes. You choose the beneficiaries and terms, and the trustee or trustees oversee the distribution of your assets after your death.

Bypass trusts are used to ensure that both partners of a marriage pay minimal estate taxes. Each person creates a bypass trust. When one spouse dies, a portion of the estate equal to the amount that can be transferred, tax free, is reserved for future beneficiaries, and the rest of the estate passes, tax free, to the surviving spouse. The surviving spouse may also receive income from the first trust’s assets. After the second spouse dies, the assets in the first bypass trust go directly to the named beneficiaries, such as the children. So do the assets in the trust of the second spouse to die. Estate taxes apply only to any taxable amount left in that person’s estate.

A qualified terminable interest property trust (QTIP) is a kind of bypass trust that lets you determine who the second beneficiary will be. That might be a good way to pass extra assets on to your children from an earlier marriage, for example, without cutting your current spouse’s income if you die first. However, keep in mind that if your spouse creates a QTIP trust, you’ll have no right to change any of its provisions.

This information is provided with the understanding that the authors and publishers are not engaged in rendering financial, accounting or legal advice, and they assume no legal responsibility for the completeness or accuracy of the contents. Some charts and graphs have been edited for illustrative purposes. The text is based on information available at time of publication. Readers should consult a financial professional about their own situation before acting on any information.

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