Protect your assets with a trust

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Contrary to what many people think, trusts are not only for the wealthy. People from all walks of life may benefit from trusts.

What is a trust?

Generally speaking, a trust is a legal device that allows someone to channel the benefits of an asset to one person while assigning control of the asset to another. The person who creates the trust, the original owner of the asset, is known as the grantor. The person who manages the trust is known as the trustee. And the person who receives the benefits is known as the beneficiary.
The trustee is the linchpin of the arrangement. A trustee may be a confidant, relative or business associate of the grantor. But it is commonly either a licensed professional such as an attorney or accountant or a corporate entity such as a bank or trust company. Trustees should have access to expertise in taxation, estate law and asset management. Their primary responsibility is to act prudently in the best interests of the beneficiary — something known by the legal shorthand fiduciary responsibility.

Trust categories

Trusts are drafted as either revocable or irrevocable and may take effect during your lifetime or after death.
  • Revocable trusts can be changed or revoked at any time, so the IRS considers revocable trust assets to still be included in the grantor's taxable estate. This means that the grantor must account for income taxes on revenue generated by the trust and possibly estate taxes on those assets remaining after his or her death.
  • Irrevocable trusts cannot be changed once they are executed. Therefore, the assets placed into a properly drafted irrevocable trust are permanently removed from a grantor's estate and transferred to the trust. However, income and capital gains earned by trust assets are normally taxable as earned. If the trust retains the investment proceeds it generally pays any taxes due. If the trust pays out investment proceeds to beneficiaries, they typically account for the taxes. These trusts may be either living or testamentary.
  • Living trusts (technically known as inter vivos trusts) take effect during the grantor's lifetime, allowing the grantor to be both the trustee and beneficiary. Upon the grantor's death or incapacity, a designated successor trustee manages or distributes the remaining assets according to the terms set in the trust. These trusts may be either revocable or irrevocable.
  • Testamentary trusts take effect upon the grantor's death and are generally activated as part of the grantor's will

Benefits of a trust

Typically, most people use trusts to help maintain control of assets while they're alive and medically competent, as well as to maintain control of the disposition of assets indirectly if they're medically unable to do so or in the event of death.
Trusts are commonly used to:
  • Control assets and provide security for beneficiaries (one of whom can be the grantor in a revocable trust)
  • Provide for beneficiaries who are minors or require expert assistance managing money
  • Minimize the effects of estate or income taxes
  • Maintain expert management of estate assets
  • Minimize probate expenses
  • Maintain privacy
  • Protect real estate holdings or a business

Flexibility to meet your needs

Different kinds of trusts are designed to meet different needs and objectives. The examples that follow are a small subset of trusts that may be available to you.
An irrevocable life insurance trust (ILIT) helps your beneficiaries meet your estate tax obligations by providing tax-free proceeds on a life insurance policy the trust purchases for you.
A qualified personal residence trust (QPRT) allows you to remove your residence from your estate, and reduce gift taxes, through an arrangement in which you live in the home for a predetermined number of years, after which time ownership is transferred to the trust or beneficiaries. Note that if you die before the term of the trust ends, the home is considered part of your estate.
A generation-skipping trust can help you leave bequests to your grandchildren and minimize any generation-skipping transfer tax exposure. (Federal generation-skipping transfer tax applies to large estates and can be up to 40% in 2017).
A charitable lead trust (CLT) lets you pay a charity income from the trust for a designated amount of time, after which the principal goes to the beneficiaries, who receive the property free of estate taxes. However, keep in mind that you'll need to pay gift taxes on a portion of the value of the assets you transfer to the trust.
A charitable remainder trust (CRT) allows you to receive income and a tax deduction at the same time, and ultimately leave assets to a charity. The trustee will use donated cash or sell donated property or assets, tax-free, and establish an annuity payable to you, your spouse or your heirs for a designated period of time. Upon completion of that time period, the remaining assets go directly to the charity. Highly appreciated assets are typically the funding vehicles of choice for a CRT.

Consider the costs

Different types of trusts and trustees can require a variety of fees for administration and wealth management. As you develop your trust strategies, remember to consider the costs that may be involved and weigh them carefully in relation to the benefits.

Is a trust right for you?

Although not quite as popular as wills, trusts are becoming more widely used among Americans, wealthy or not. Increasing numbers of people are discovering the potential benefits of a trust — how it can help protect their assets, reduce their tax obligations, and define the management of assets according to their wishes in a private, effective way.

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