Trusts serve far more varied purposes than many people realize, and they aren’t just for the wealthy.
A trust may be right for you if you need to accomplish any of these goals:
- Avoid probate.
- Transfer your business or real estate seamlessly after death.
- Protect assets from creditors and lawsuits.
- Give assets to a minor child.
- Parcel out an inheritance over time.
- Provide for a special-needs child.
- Leave money to charity.
Learn how a trust, when established with professional help, may be a useful financial planning tool in each of these situations.
When you use a will to transfer your estate’s assets, a court is involved in settling and distributing them. Called probate, it is the process of settling one’s estate. It may take six to eight months or more to complete the process, and it may involve extensive paperwork, court hearings, and attorney’s fees. (The process is usually longer and more complicated in the absence of a will.)
Also, because court documents become public record, probate makes a family’s private financial matters public, such as a will. Placing assets in a trust while you are still alive can reduce probate expenses after your death and maintain your privacy.
Learn more: Probate: What it is, why people fear it
Along similar lines, transferring your business into a trust will allow it to continue to operate without interruption instead of getting tied up in probate after your death. Talk with a financial professional to make sure you have enough insurance coverage to repay your personal debts and any estate taxes when you die. That may help prevent creditors from pursuing your business assets and keep your heirs from possibly having to sell the business to pay final expenses.
Professional advice is important when choosing a trustee for your irrevocable trust. It’s also essential to have a succession plan for your business .
Transferring real estate to a revocable trust can not only keep it out of probate but also help prevent it from being reassessed for property tax purposes because you do not have a change in ownership in the underlying real estate. On the other hand, transferring real property into an irrevocable trust will actually trigger a reassessment because this is a change in ownership and may result in higher property taxes. Additional considerations apply for mortgaged properties. Because laws vary by state, it’s important to get professional advice before transferring real estate to a trust.
The process itself is straightforward. A quitclaim or grant deed can be used to transfer real estate ownership from an individual to a trust. A notary witnesses the documents’ signing, and the local government records the change in ownership after receiving the paperwork. Real estate insurance policies should be updated to name the trust as beneficiary. Talk to your financial professional in advance to make sure this won’t be a problem and that you have appropriate coverage. Keep in mind that there may also be gift tax implications when you transfer real estate to a trust.
Learn more: Making sure heirs don’t fight
While a revocable living trust, the kind you might use to avoid probate, will typically not protect assets from creditors and lawsuits, a properly structured irrevocable trust can because assets in this type of trust are generally outside of your estate. When you employ this type of trust, however, you must permanently give up your ownership interest in the assets you place into it and your control over those assets.
Taking it a step further, an irrevocable life insurance trust may be a valuable planning tool for high-net-worth individuals and couples seeking to mitigate estate taxes and maximize wealth transfer to their heirs. Most people consult a financial professional when considering such an option.
One option for giving assets to a minor is a 2503(c) trust, named after the relevant section of the tax code. This trust allows an adult to control the use of the trust property until the beneficiary turns 21. It can reduce the grantor’s estate taxes and shift taxable income to a minor child who has a lower tax rate than the grantor. A downside is that the grantor loses control of the assets when the beneficiary turns 21.
A trust set up for a child’s benefit can be either a simple trust or a complex trust. These are legal terms that determine whether the trust must distribute all its income each year (simple) or not (complex), said Morris Armstrong, an Enrolled Agent in Cheshire, Connecticut, who specializes in representing taxpayers before the IRS.
A complex trust can provide greater protection should the child have behavioral or substance abuse problems, Armstrong explained in an interview. A trustee can be given full discretion to make distributions of trust income or principal to a beneficiary. It’s advisable to seek out a lawyer to set up such a trust.
With a spendthrift trust, you can make sure your beneficiaries do not squander their inheritance or have it attached by creditors. A trustee controls the trust’s assets and parcels them out to the beneficiary over time in accordance with the trust’s terms.
This type of trust can, for example, be used to help provide for and protect an adult child who is not good with money, who suffers from an addiction to drugs or gambling, or who later gets a divorce. The grantor can require the trustee to give the beneficiary a certain amount of money from the trust each month, or give the trustee the discretion to withhold benefits under certain circumstances, among other possibilities.
Learn more: Helping a loved one with money problems
Children and adults with special needs may be eligible for Supplemental Security Income and Medicaid, two federal benefits that help with living and medical expenses for individuals who can’t support themselves fully or at all.
Leaving assets directly to a special-needs child can jeopardize eligibility for these benefits. Instead, creating a special-needs trust controlled by someone who is not the beneficiary can maintain benefit eligibility.
The trustee must not give assets directly to your special-needs child, but can use the trust assets to supplement, but not supplant, any governmental benefits they may be receiving. At least as important as maintaining eligibility for benefits is knowing that your child will be provided for in your absence.
Learn more: Financial advice for special-needs families
There are two types of trusts that can be used to facilitate gifts to charity: charitable remainder trusts and charitable lead trusts. Both are irrevocable trusts, which require the grantor to give up control of the assets placed in the trust, and both can provide income tax deductions and estate tax mitigation.
The remainder trust provides current income payments to the grantor followed by payment of the remaining trust balance to a charity, while the lead trust provides current income payments to a charity followed by payment of the remainder interest to a non-charitable beneficiary.
Complexities surrounding which types of assets to place in a charitable trust, tax deductions, and other matters make professional help invaluable.
Learn more: Life insurance for charity
These are just a few of the types of trusts available to help you protect your assets and provide for your loved ones and favorite charities. With the help of a financial professional and other experts ― like an attorney, accountant, or bank trust officer ― a trust can be a valuable estate planning tool to address your legal and financial concerns and help you realize your lifetime goals.
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