When it comes to estate planning, many people create a will to have their assets distributed after they pass away. But there’s another aspect of estate planning that may offer unique benefits to you and your family: a trust.
A trust is a legal contract, drafted by an attorney, with a named trustee who ensures your assets are managed according to your wishes both during your lifetime and after your death. While people usually set up a trust during their lifetime, you can also stipulate in your will that you want to create a trust upon your death. Here are five benefits of adding a trust to your estate planning portfolio.
While assets controlled by your will have to go through probate in order to be verified and distributed according to your wishes, trust assets usually don’t; a will becomes a part of public record, while a trust agreement stays private. When you establish a trust during your lifetime, you only need to deal with your attorney and your trustee to execute the agreement.
Privacy is important if you want to keep your family’s financial matters outside of public view. Plus, by avoiding the probate process, trusts are often a quicker and simpler way to have your assets distributed when you die. You may even decide to have your will state that any assets held outside of a pre-existing trust at the time of your death transfer into the trust when you pass away. When you’re dealing with the death of a loved one – or the transfer of assets from one person to another – you likely want the change to be as seamless and private as possible. Creating a trust can help you achieve both of those goals.
Trusts can either be revocable or irrevocable, essentially meaning that they can either be amended after they are created – or not. A revocable trust gives you the option to make changes to it after it’s signed, but, depending on its terms, it may or may not lead to tax advantages further down the line.
An irrevocable trust, however, is one that you cannot usually change after the agreement is signed – and setting up this kind of trust may bring about transfer tax benefits because you have transferred assets out of your estate. Contributions to the trust are generally subject to gift tax requirements during your lifetime. However, if certain conditions are met, assets placed in this type of trust (and appreciation on those assets over time) will be sheltered from estate tax after your death.
In addition to initial funding, you can make an annual exclusion gift up to $15,000 (or $30,000 for married couples filing a joint return for tax year 2019) to an irrevocable trust each year without having to pay additional gift tax on that contribution. Speak with your trust administrator and attorney about whether a revocable trust and/or an irrevocable trust might be a good estate planning option for you and your family.
Whether you establish a trust under your will and/or create a separate trust agreement during your lifetime, trusts give you the ability to truly customize your estate plan. You can include conditions such as age attainment provisions or parameters on how the assets will be used. For example, you can state that you’d like the money in a trust to be given to your grandchildren only once they turn 18 and only to be used for college tuition. Or you might decide to limit how much money a beneficiary can receive from the trust each year if they’re someone who may need extra help managing money.
Your trust administrator can help you talk through different possibilities and scenarios before your attorney drafts the actual trust document for your trust.
Wills only go into effect when a person passes away, but a revocable trust established during your lifetime can also help your family if you become ill or unable to manage your assets. If that happens, your trustee can make distributions on your behalf, pay bills and even file tax returns for you. You can choose ahead of time who to appoint (through the trust) to manage the assets.
Though no one likes to think about these scenarios, building in provisions like these can safeguard your family from having to make decisions without knowing your wishes during difficult times.
If you choose to create a revocable trust, you can change the terms of the trust agreement at any time by executing an amendment to the document. This allows you to be adaptable and flexible to life’s changing circumstances. Maybe down the line, you become involved in a charitable cause you’re passionate about. Or perhaps you have a new grandchild that you’d like written into the trust. If so, you can add them as future beneficiaries into your trust at that time.
Life can be unpredictable, but creating a revocable trust allows you to adapt your estate plans appropriately.
So there you have it. When you create a trust, you set up a plan to take care of the people you love when you’re no longer around or lack capacity to assist them. Not only can a trust simplify the process of asset distribution, it can help you leave a lasting financial legacy.