Trusts: Another Corner of Your Estate Plan

You already have a will -- why create a trust? Like a will, a trust transfers property. But, unlike a will, a trust can take effect at any time to distribute and manage assets and save taxes.

Different kinds of trusts can serve different purposes and benefit different individuals or organizations. Following is a brief overview.

Trust Basics

Although there are several types of trusts, each having different goals, all are based on one of three models. A testamentary trust is created by your will -- which names a trustee to manage the trust assets -- and is funded by your estate. The trust's primary goals are to save estate taxes and provide long-term management of estate assets. A living, or inter vivos, trust is established during your lifetime to manage assets and transfer property outside of probate. A pour-over trust is created during your lifetime but funded after you die with payouts of pension benefits, life insurance, or other property that you haven't specifically transferred to a person by gift, trust, or will. Living and pour-over trusts may or may not offer tax advantages.

As the trust's creator, you set up the trust, name the trustee(s) and beneficiary(ies), and transfer property into the trust. You also determine how the assets will be paid out and how long the trust will last.

Trust Advantages

If you have a sizeable estate, a trust may offer significant benefits. A trust can provide a lifetime income to an individual and eventually pass the remaining property to heirs. A trust can also ensure professional asset management, protect assets for financially inexperienced beneficiaries, and help you take advantage of tax law benefits to reduce or eliminate estate tax.

Revocable or Irrevocable?

If you create a revocable living trust, you can modify it by replacing the trustee, changing the beneficiary, or even terminating the trust. A revocable trust can protect your assets if you become unable to manage your affairs. However, such a trust normally does not reduce income taxes while you're living or estate taxes after you die.

With an irrevocable living trust, the trustee and beneficiaries you name and the property you transfer into the trust cannot be changed (although a trustee may resign and be replaced). Because the property you transfer is no longer yours, an irrevocable trust can provide significant tax savings, since, if income is distributed, the beneficiary - and not the trust creator - pays income tax on the trust's earnings. When you die, the trust property is excluded from your estate and is not subject to estate taxes. Through the trust, you control the distribution of trust property to your heirs.

Charitable Giving

Trusts can also be created to benefit charitable organizations while providing tax advantages to the creator. A charitable trust reduces your estate and allows you to take a charitable deduction on your income tax return in the year you establish the trust. Depending on the trust type, you or someone you designate can receive income from the trust assets during the trust's term (with the assets eventually passing to a charity), or your heirs can receive the trust balance after a charity has received trust income for a specified time.

Contact us today to speak to a financial professional about estates and trusts.