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Planning Trusts and Estates: What You Need to Know Thumbnail

Planning Trusts and Estates: What You Need to Know


Trusts aren’t just for the rich and famous. Anyone can have one and probably should. Trusts and estates are complicated topics and may even be challenging to discuss since it means you’re talking about not being on this Earth any longer, but it’s necessary.

The earlier you handle trusts and estates, the more you can enjoy life with peace of mind.

Related Article | The Finance Dictionary: Learn the jargon your Finance friends speak!

What Is a Trust?

A trust is a legal entity that holds your assets. The third-party holds and controls your assets. Upon your passing, the trust distributes the assets as you requested. The trust also protects your assets since they aren’t in your name.

There are different types of trusts, each with different rules and outcomes, but each trust has the following parts:

  • Trustor or Grantor - you or the person setting up the trust
  • Trustee - the person in charge of the trust
  • Beneficiaries - the people named in the trust to receive the assets upon your passing

The Types of Trusts

Most people know of two types of trusts - revocable and irrevocable. However, within each type of trust are different nuances you may want to consider.

Revocable Trust

As the name suggests, a revocable trust can be altered or changed. You can change the assets within the trust, change beneficiaries, or even revoke the trust altogether. A revocable trust is known as a living trust because it allows your heirs to skip probate and allows you to manage your assets while you're alive. 

Once you die, though, the trust becomes irrevocable. Revocable trusts pay estate taxes and have the same treatment as other assets you may own outside of it.

Irrevocable Trust

An irrevocable trust is the opposite of a revocable trust. It can’t be altered or changed. Once you set up the trust, that’s it. You transfer the assets out of your name and into the name of the trust.

If you’re trying to decrease your estate taxes, this trust will help accomplish the goal. Because the assets are in the trust and not a part of your estate, you don’t pay estate taxes on any earnings unless you take distributions, then you’ll pay taxes. 

Other Types of Trusts

Other common trust options include:

  • Marital trust - This trust becomes effective when one spouse dies. It ensures the surviving spouse and any heirs receive the benefits you set up.
  • Bypass trust - Also known as the ‘credit shelter trust,’ this trust doesn’t become a part of the surviving spouse’s estate to avoid estate taxes.
  • Generation-skipping trust - This trust also keeps the assets out of the estate, so other generations (children, grandchildren, etc.) don’t pay taxes on the proceeds.
  • Special needs trust - This trust covers the needs of special needs dependents without causing them to lose any government support. 

Related Article | Personal Trusts: How Do They Work?

What Are the Benefits of a Trust?

People set up trusts and estates for various reasons, but here are the most common.

Skip Probate

Probate delays the distribution of assets and can even decrease an estate’s value. When your assets are in a trust, your beneficiaries can skip probate and receive the payouts immediately. 

Lower Tax Liability

While the estate tax limit is quite high ($11.7 million) for 2021, some people still need to bypass the estate tax for their large estates.

When your assets are in a trust, you don’t pay estate taxes or gift taxes when distributing the funds. This is most helpful in states where estate tax laws are more complex and expensive since most people can bypass the federal estate laws.

You Have Control

Even though you put your assets in a trust, a separate entity, you are in charge of where they go and how they’re distributed. You also name the trustee and beneficiaries. If you need a successor trustee ‘just in case,’ you can choose that as well.

May Provide Protection From Creditors or Lawsuits

When your assets are separate from you, creditors, or others suing you, may not come after them. This is only the case in an irrevocable trust, though, so if this is your goal, make sure you talk to your advisor about the right way to set up the trust.

You Control How Support Is Distributed

If your estate will go to minors or children with special needs, you can dictate how the assets are distributed, so they are allocated correctly and your heirs have enough support.

It’s Private

No one will know about your assets when they are in a trust. It is not public record, unlike a will.

Related Article | Trust Taxation: Everything You Need to Know

5 Steps to Set up a Trust

Setting up a trust isn’t as overwhelming as it seems. With the help of a trusted advisor and these steps, it can be easy to navigate trusts and estates.

  1. Choose the Type of Trust
    Decide if you want a revocable or irrevocable trust. If irrevocable, you can only set it up with an advisor. If you choose revocable, you can use digital programs, although using an advisor is always advised.

  2. Decide Who Plays What Role in Your Trust
    You must choose a trustee, successor trustee, and beneficiaries. Remember, if you set up an irrevocable trust, this can’t change.

  3. Decide Which Assets You’ll Put In the Trust
    Work with your advisor to determine which assets belong in the trust. It costs money to take assets in and out of trusts, so make sure you’re solid on your decision before putting anything in the trust.

  4. Decide How You’ll Fund the Trust
    You may be able to use a current bank account if you put it in the trust’s name. However, it’s often easiest to open a new bank account for the trust.

  5. Transfer the Assets to the Trust
    Once you set up the trust, you must physically transfer the assets. Some assets, like cars and homes, require an extra step or two. You must have the proper documents (title or deed) recorded in the trust’s name versus your name to transfer them legally.

How Much Do Trusts Cost?

There are many costs involved in trusts and estates. First, there’s the initial setup fee, which varies by location and attorney. It also depends on how complex the trust is and if you also need a will created. Fees typically start at $1,000 and go up from there.

If you have a third party oversee the trust, you’ll pay maintenance fees. This is typically an annual fee, and it depends on the amount of work the trustee must do. For example, if the trustee must manage your investments, the fees will be much higher than a trustee that only needs to file taxes.

Finally, there’s often a cost to re-title assets, especially cars and homes, but other assets may incur fees too. 

Related Article | Trusts 101

Tips for Setting up a Trust

Everyone has different needs and desires for their trusts and estates, but here are some tips most people can use to make the process simple.

  • Work with professionals - Don’t try to navigate setting up a trust and making these big decisions yourself. Instead, let the professionals guide you to know all aspects of the law, taxes, and consequences of putting your asset into a trust.
  • Irrevocable trusts provide the most tax protection - If you're trying to avoid estate taxes, an irrevocable trust provides the most protection since the assets don’t belong to you.
  • Irrevocable trusts provide the most legal protection - If you’re a high net worth individual, you may worry about a lawsuit or creditor taking down your assets. Putting your assets into an irrevocable trust separates them from you and protects them.
  • Trusts must file taxes - Even though your assets are no longer in your name, the trust itself must file taxes. Get with a tax advisor to help you with this process. 

Final Thoughts

Taking care of your trusts and estates early on will provide you peace of mind. A trust keeps your assets separate from you, which can have many tax and legal benefits. Even if your estate is small, a trust can help protect it and leave your beneficiaries with a higher payout since less money goes to the courts for probate and Uncle Sam for taxes.