What Is a Trust and Why Do I Need One?
Too often, people mistake wills for trusts, but there is a difference between a trust and a will. A will is a legal arrangement that controls the distribution of your properties to heirs and beneficiaries after your death. On the other hand, trusts are legal documents that outline your wishes for managing your assets. Note that trusts do not require one to die for them to come into effect. They become effective when you transfer assets into the trust fund or account.
However, an attorney or trustee can create a testamentary trust after death, where a will outlines the instructions for the trust administration. Now that you know what trusts are, let’s explore the types of trust and why you need one.
Types of Trusts
There are two basic trust categories: revocable and irrevocable trusts.
- Revocable Trust
A revocable or living trust is created and used during the grantor’s lifetime. You can change the details of the trust and use it to avoid the legal process of estate settlement and plan for incapacitation.
- Irrevocable Trust
As the name suggests, you cannot change this trust. Its primary purpose is to receive, hold, and distribute assets after the estate owner or grantor dies. Examples of irrevocable trusts, such as:
- testamentary trust;
- education trust;
- special needs trust;
- grantor retained annuity trust;
- charitable trust.
When people hear the phrases “trust” or “trust funds,” the first image that comes to mind is a wealthy family living in a mansion with inherited assets. However, you need not be related to the world’s billionaires to benefit from or draft a trust. You should have one because trusts serve as helpful estate planning tools. Below are the reasons you need these legal contracts.
Avoid the Probate Process
The primary goal of estate planning is to protect loved ones from engaging in legal battles over your estate when you pass away. Unfortunately, wills must go through probate (a legal process) to verify and transfer the assets listed to the rightful beneficiaries. Setting up a trust is one of the best ways to avoid probate and ensure the quick transfer or distribution of properties to the named heirs.
Unlike wills, which become public records, trusts remain private. Only you, your attorney, and your trustee know the details of the trust, thus preventing the public from knowing your family’s financial matters.
Trusts Lower Estate Taxes
Taxes charged on estate can limit your ability to leave a significant value of assets to your loved ones. That is because estate taxes are taxes transferred to a beneficiary of assets or wealth a deceased loved one passes on. Trusts minimize estate tax liability, save you money, and maintain your estate value.
Remember, the tax benefits you enjoy depend on the type of trust you choose. For example, a revocable or living trust cannot help you or your beneficiaries reduce or eliminate estate taxes. But, when you write an irrevocable trust, you shield your estate from tax liability or responsibility.
Offers Control Over Your Estate
Another benefit trusts have over wills is the ability to control your estate. In short, a trust lets you give detailed instructions on how and when you want your assets distributed. You can change your trustee and beneficiaries, sell the assets, or revoke the trust altogether, especially with revocable trusts.
Since trusts are easy to customize, they are your best option if you have a complex estate. For instance, you have a business or vacation home you want to divide among multiple beneficiaries. A trust helps you divide assets fairly. However, you must work with a skilled trust attorney to ensure all transactions under your trust are legal and safe.
According to Hays Firm, experienced attorneys will help you with informed decisions about trust creation and administration. They will ensure your trust is customized to your unique, optimize asset protection, and mitigate potential legal and financial risks.
Protection when Ill, Incapacitated, or Deceased
You can write a trust to ensure you and your family have financial security if you fall sick and cannot make decisions. In such a scenario, your best option is a revocable or living trust. This legal tool allows your trustee to distribute assets, pay bills, and file tax returns on your behalf.
A trust also serves as a roadmap for loved ones to make informed decisions based on your wishes. Upon your death, a trust will ensure your spouse and children receive what’s rightfully theirs regardless of whether you divorced or remarried.
Trusts are not designed for wealthy individuals only. They are an essential part of estate planning. A trust gives you peace of mind that your assets go to the right people. Not to mention, trusts help avoid issues like probate and estate taxation. Having a trust also ensures you maintain control over your estates, assets are divided fairly among beneficiaries, and your family receives financial support even after your death.