Estate planning is the process of arranging for the management and distribution of your assets during life and after you pass away. It involves making a will, setting up trusts, and taking other legal steps to ensure your wishes are fulfilled. One important tool in estate planning is a trust, a legal entity that can hold and manage assets for the benefit of someone else. In addition to helping individuals protect and manage their assets, trusts can also provide for loved ones, minimize taxes, and ensure their legacy endures.
In this blog post, we will discuss what a trust is, how someone can use it for estate planning purposes, and explore the various types of trusts that can be used to carry out your wishes after you pass away.
What is a Trust?
A trust is a legal entity that can hold and manage assets for the benefit of someone else. The person who sets up the trust is known as the grantor, while the person who manages the trust is known as the trustee. The assets held in the trust are known as the trust corpus, while the person who benefits from the trust is known as the beneficiary. Knowing these key terms can help you as you explore the different types of trusts, which all have their own specific purpose and set of rules.
How to Use a Trust for Estate Planning Purposes
One of the primary uses of a trust in estate planning is to ensure that your assets are managed and distributed according to your wishes during your life and after you pass away. Trusts can be used to avoid probate, reduce taxes, protect assets from creditors, and provide for the long-term care of beneficiaries. Here are some examples of how trusts can be used for estate planning purposes:
Revocable Living Trust: The most common Trust is a Revocable Living Trust. This document can be changed or revoked by the grantor at any time. A Revocable Living Trust operates similarly to a Will when you pass away and is often used to avoid probate, the legal process of validating a Will and distributing assets after someone passes away. Placing assets in a revocable living trust can be distributed to beneficiaries without going through probate.
Irrevocable Trust: An Irrevocable Trust is a trust that cannot be changed or revoked by the grantor. This type of trust is often used to protect assets from creditors or reduce taxes. Once assets are placed in an Irrevocable Trust, they are no longer considered part of the grantor’s estate for tax purposes.
Charitable Trust: A Charitable Trust is a trust that is set up to benefit a charitable organization. This type of trust can provide tax benefits to the grantor while also supporting a cause that is important to them.
Special Needs Trust: A Special Needs trust is a trust that is set up to provide for the long-term care of a beneficiary with special needs. This type of trust can ensure that the beneficiary is provided for while also maintaining their eligibility for government benefits. Special Needs trust language can also be incorporated into other trusts.
Types of Trusts Used After You Pass Away
After you pass away, there are several types of trusts that can be used to carry out your wishes. Here are some examples:
Testamentary Trust: A Testamentary Trust is a trust that is created by a will and goes into effect after the grantor passes away. This type of trust can be used to provide for beneficiaries’ long-term care or manage assets for minors.
Credit Shelter Trust: A Credit Shelter Trust is a trust that is set up to maximize the use of the grantor’s federal estate tax exemption. This type of trust can be used to reduce the amount of taxes owed by the grantor’s estate after they pass away.
Generation-Skipping Trust: A Generation-Skipping Trust is a trust that is set up to benefit grandchildren or future generations. This type of trust can be used to avoid estate taxes on assets that would otherwise be subject to multiple generations of taxation.
Work With an Experienced Estate Planning Attorney
Trusts are an important tool in estate planning that can help ensure your assets are managed and distributed according to your wishes after you pass away. If you’re interested in exploring more about how a trust can help safeguard your and your family’s future, reach out to our office to learn more about how we can help.