There are many types of trusts, each geared to achieving a particular goal. Trusts help people avoid probate. Using trusts to manage and distribute property can be an effective alternative to a will. You can create a trust that benefits you and your spouse while alive, and upon death, distributes assets to your children or others. Unlike wills, trusts are not part of an estate, so they are not subject to probate. Trusts can reduce or eliminate taxes. Trusts can remain private affairs.
Trusts as Estate Planning Tools
Many people believe that trusts are only for the wealthy. This is far from the truth. Trusts are invaluable tools in the estate plans of millions of regular individuals. A trust is simply an arrangement where one party holds property on behalf of another party. In estate planning, a trust is created by the person doing the estate planning (the settlor), who authorizes another person (the trustee) to manage the assets for the benefit of a third party (the beneficiary). There are many reasons for establishing trusts including tax minimization or providing for the needs of underage or disabled beneficiaries.
Some trusts that may be useful in estate planning are explained below:
Trust funds for minors. Many people leave money to their children or grandchildren in a trust as part of an estate plan. This is typically done to ensure the money is there for the children’s benefit while they are young for support, education, medical expenses, etc. Once the children reach a certain age or achievement level (such as obtaining a college degree), they may receive money from the trust to do with as they please.
Special needs trusts. These enable a person to leave property to a disabled individual, many of whom receive government benefits. Special needs trusts protect the disabled person from becoming disqualified from government benefits while allowing this person to receive funds for expenses beyond basic needs to enhance the quality of life.
Marital trusts. In the past, marital trusts were sometimes needed for estate tax exemptions and property protection. As estate tax statutes change, marital trusts may be useful in the future. Marital trusts can also protect property from a spouse to ensure that it goes where intended, for example, to a husband with grown children from a previous marriage. He may decide to let his wife use his property after he passes, but puts it into a trust so that after she passes, it goes to his children.
Revocable living trusts. Revocable living trusts are documents completely separate from wills, although they often work hand in hand with wills to carry out someone’s wishes. Revocable living trusts are used to avoid probate or when a person owns real estate in multiple states.
Irrevocable life insurance trusts (ILIT). ILITs can be used to move a person’s life insurance proceeds outside his or her estate to reduce or avoid estate taxes.
Spendthrift trusts. These are established to protect the assets of a beneficiary from creditors or the beneficiary himself/herself. This type of trust has an independent trustee with complete discretion over the distribution of assets of the trust because the parent providing the inheritance does not wish the beneficiary to lose funds because of a debt or hostile divorce.
Stretch or standalone IRA trust. You may name a trust as the beneficiary of an IRA (individual retirement account) instead of naming an individual. This is useful if your beneficiary is underage, a poor money manager, gets a divorce, has creditors, is disabled or most of the assets are expected to go to paying taxes. This trust allows your beneficiary to organize the distribution of assets to reduce taxes. With this trust, the age of each beneficiary becomes the age for that beneficiary's distribution. And, the IRA can continue to compound for many years income tax free, and could grow substantially in value.
As you can see, there are many options for trusts, each of which can be customized to serve a valuable purpose in accomplishing your wishes. Our estate lawyers can help you assess your financial goals to determine the best vehicles to preserve your wealth and leave your legacy.
Reach Out to Us
With just a little planning, you can get on the road to protecting your assets, planning your estate, and minimizing your taxes so you can relax with peace of mind about what will happen should you become incapacitated or pass away. Call us today at 205-663-0281 for a free consultation if you want to know more about trusts and estates and how to avoid probate. John Holliman and Melanie Bradford Holliman will help you with trusts and estates so you can take care of your nest egg and your loved ones. We treat you like family.
Let us help you create a trust account for your life, as well as your death, that includes the steps necessary to get you and your loved ones from today to the future as smoothly as possible. We offer a free consultation. Click here to reach the contact us form. Use it to get started. Or call us at 205.663.0281.
Christine Graham, Paralegal