Trusts are an important part of your estate plan, and there are several different types.
Revocable Living Trust
For some people, a revocable living trust can be more effective than a will. One of its advantages is that your assets pass to your heirs without having to go through probate—the process by which a court oversees the distribution of your assets. That can result in significant savings if you have a large estate or if you own property in more than one state, where multiple probate proceedings may be required. Also, unlike the probate process, settling a revocable living trust is private; another advantage if you don’t want people to know who got what.
Trusts vs. Wills
But living trusts aren’t for everyone. They’re more expensive than wills and, to make them effective, all your assets must be transferred into the trust. Finally, unless it is teamed with tax planning, a living trust by itself won’t save on estate taxes. Utilizing the services of an attorney experienced in drafting these kinds of trusts is imperative.
Many people don’t realize that the proceeds from life insurance policies that they own at death may be included in their estate for estate tax purposes. An irrevocable life insurance trust (“ILIT”), insures that insurance proceeds paid to the trust will not be included in the estate of the insured. In addition, the ILIT can also be structured so that the trust will provide benefits to the insured’s surviving spouse without inclusion in the surviving spouse’s estate. An irrevocable trust, cannot be rescinded, amended, or modified after it is created. In other words, once the grantor contributes property to the trust, he or she cannot later reclaim ownership of the property or change the terms of the trust.
Charitable Remainder Trust
A charitable remainder trust is an arrangement under which property or money is donated to a charity, but the donor continues to use the property and/or receive income from it while living. The beneficiaries of the trust (whether the donor or someone else) receive the income and the charity receives the principal after a specified period of time. This is particularly useful when the donor has appreciated assets (i.e., assets in which the present value is greater than the basis, such that the sale of the asset would result in a hefty capital gains tax). Using this kind of trust, the donor can avoid the capital gains tax on the donated assets and also get an income tax deduction. In addition, the asset is removed from the estate, reducing estate taxes. Under the right circumstances, this plan can increase income, reduce taxes, and provide support for the charity or charities of your choice.
Special Needs Trust
A special or supplemental needs trust, is used to provide for the needs of a disabled person, without disqualifying him or her from benefits received from government programs such as Social Security and Medicaid. Such trusts allow a disabled beneficiary to receive gifts, lawsuit settlements, or other funds in a manner such that the funds will not be considered to belong to the beneficiary in determining eligibility for public benefits. These trusts are not intended to provide basic support, but instead to pay for comforts and extras that are not available from public assistance. These trusts typically pay for things like education, recreation, travel, clothing, counseling, and medical attention beyond that provided by governmental programs. (Although, the trustee can use trust funds for food and shelter if the trustee decides doing so is in the beneficiary’s best interest despite a possible loss or reduction in public assistance.)
Supplemental needs trusts can be created by a parent or other family member, or may be set up in a Will as a way for an individual to leave assets to a disabled relative. Under certain circumstances, a disabled individual may also be able to create the trust himself, with proceeds from a personal injury award or settlement.
Find out how Kathy can help you decide on the right trust with a free consultation.
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