A trust is an arrangement in which property is held by one party for the use of another, and it is formidable in establishing how the property within the trust will be used and maintained.
There are a variety of trusts to choose from, each having a specific purpose. Your financial planner will discuss your options with you, and together you can select the trusts that best fit with your strategic plan to maximize your estate and minimize your taxes and costs. Here is an explanation of some of the trusts that are available.
Revocable Living Trust
A revocable trust, also called a revocable living trust, is a trust that can be altered or revoked by the trustor at any time. This allows the person who created the trust to keep complete control of the included property while also removing the property from the probate process. Should death occur, the trust becomes irrevocable and the trust controls the distribution of its included properties, not the decedent's will. A revocable trust avoids probate, avoids public knowledge of its contents, avoids inclusion if the deceased's will is contested in court, and provides a course of action in case of incompetence or incapacity.
There are details to know, and your financial planner will safeguard your estate with ongoing diligence as circumstances change. Some properties are best not included, such as certain depreciating assets and S corporation stock, and there are a variety of issues that will be either applicable or irrelevant, such as making gifts from your revocable living trust. Your planner is expert with guiding your path through the many trust considerations available to you.
An irrevocable trust is a trust that cannot be changed by the trustor, and can only be modified by the beneficiary of the trust. An irrevocable trust benefits the trustor by removing the property from the trustor's estate, which eliminates the property from probate and tax liability, as well as any income generated by the assets. Property held in trust can be a business, life insurance policies, cash, investment property like stocks, bonds, and real estate, and more.
Other Types of Trusts
The following is not a full listing of the many trusts available to you, but is intended instead to demonstrate there are myriad choices available to serve your estate according to the strategic plan you and your financial planner have created.
The basic plan is to retain as much of your estate's value as possible by limiting tax liability, and transferring your estate's properties efficiently to your beneficiaries. Each person's circumstances are unique, so the assortment of trusts from which you can choose provides opportunity to protect the wealth you've worked so hard to build. Critical to this endeavor is using the trained skills and talents of a professional and independent financial planner who understands your goals and can guide you toward achieving them.
1) Irrevocable Life Insurance Trusts: By shifting your life insurance policies into a trust, these policies avoid probate, the proceeds are also kept out of your estate, and you ensure that your beneficiaries have liquidity to help them through the transitional period following your death. In addition, though you lose the capacity to exercise complete control, additional advantages are that the assets cannot be claimed by creditors, you can name your trustee and specify how the policy proceeds are to be invested, and you can also specify the timing of when the trust's beneficiaries will receive their proceeds.
2) Revocable Life Insurance Trusts: While a revocable life insurance trust won't provide protection from tax liabilities, it does offer other benefits that may be attractive, such as controlling the trust by yourself or through a professional manager; you can make adjustments according to your life's changing circumstances of birth, death, divorce, and marriage; and among a variety of other details you will discuss with your planner, including both various advantages and disadvantages, you have shielded these assets from probate.
3) Bypass Trust: The assets in this trust bypass the surviving spouse's gross estate, allowing the surviving spouse to potentially receive distributions without triggering tax liabilities, assuming certain parameters are maintained. This trust is best employed with assets that are expected to appreciate in value.
4) Marital Trust: A marital trust, known also as an "A" trust, is established for the use of the surviving spouse and the children of the married couple. The marital trust effectuates on the death of the spouse, at which time identified assets are moved into the trust, and income generated by the assets, and sometimes the principal, can be used by the spouse. These assets avoid probate and prevent taxation.
Then, upon the death of the surviving spouse, the marital trust can be used with a credit shelter trust, also known as a "B" trust and a bypass trust. The purpose of a B trust is to assure that the assets go to the married couple's children, not to the new children of the surviving spouse if there is a remarriage with children.
5) The A - B Trust: Also known as a 'credit shelter trust, or CST, the A - B trust is the name given when the two trusts described above are used to work together. In further explanation, assets are transferred to the beneficiaries, normally the couple's children, but the surviving spouse retains rights to the assets and the generated income for the rest of their life.
6) The Qualified Terminable Interest Property (QTIP) Trust: This trust provides income and sometimes the principal for the use of the surviving spouse, and then for the allocation of the assets after the surviving spouse has died.
7) Trusts to Provide for a Dependent with a Disability: In this case, any of several different types of trusts can be established to benefit an individual with a disability, providing supplemental resources for this person's well-being without jeopardizing the ability to also receive the assistance of public funds. Supplementation may be for additional nursing care, public housing cost differentials, travel expenses for visits by the family to the individual, and any expenditures which benefit the individual without disqualifying the person from any public assistance program.
8) Trusts for Minors: As you might imagine, there are also a variety of trusts available for minors.
There is the "discretionary trust," also known as the "minor's trust" which permits tax deductible financial gifts to a minor until they turn 21; it is defined by the Internal Revenue Code, Section 2503(c).
The "mandatory income trust" or "income trust" provides an annual income for a minor's care and welfare. The income is taxable, but the donor may avoid taxes depending on their meeting the annual gift tax exclusion requirements. This trust is defined by the Internal Revenue Code, Section 2503(b).
The "Crummey trust," named after the first person to use it, provides that the beneficiary has a set time, usually 30 days, to use the newest deposit to the trust; if the newest contribution goes unused, those funds are then added to the inaccessible portion of the trust and released later according to the terms of the trust. This is a 'use it or save it' trust.
It's easy to see there are a variety of trusts available for a variety of purposes, and many more than are mentioned here. As always, it's important to remember that you don't know what you don't know, so it's the wise person who seeks the counsel of trained professionals who can then provide guidance on the array of choices, and work with you to select the best path to achieve your goals and satisfaction.
Estate planning, including creating a trust, is a complicated process and an important part of the exit planning process for business owners. For more information, visit Synergetic Finance online or read Joseph M. Maas' book "Exit Insight: Getting to Sold!" available through Merrell Publishing