Estate planning ultimately concerns transferring your wealth to whom you wish when you die or become incompetent while effectively dealing with issues of taxes, publicity, asset protection, or your health and care. To address these concerns and issues effectively, you often need an entity other than you or your spouse to hold assets, to distribute money correctly, and to carry out your wishes when you no longer can. That entity is a trust.
A trust is a legal entity ? just like a person is. You, the grantor of the trust, create it and fund it with your assets. You create the trust document which states the purpose of the trust and how that purpose is to be carried out. It holds and manages assets for the trust?s beneficiary ? who you assign. You appoint a trustee to carry out the provisions of the trust document. That?s it! But generally you need a lawyer who is familiar with trusts and will make sure your trust will work as you wish it to.
There are a variety of trust types. Each type of trust is specifically fashioned to achieve its purpose. And that?s what we want to overview so you?ll be aware of the type of trust you may want.
*Key attributes of all trusts:
But there are a couple of trust attributes that will characterize any trust. The first of these is that all trusts fall into two main categories ? testamentary and intervivos. A testamentary trust is one created by your will. You specifically set up your trust within your will. It?s officially created at your death when your will comes into effect. On the other hand, an intervivos trust is created by you and goes into effect while you?re still living.
The next attribute of trust is whether it is revocable or irrevocable. You can make an intervivos trust either revocable or irrevocable. A revocable trust (often called a ?living trust?) can be revoked or dissolved by you at any time. In sharp contrast to this, an irrevocable trust can?t be revoked. It remains permanent and works only according to its written provisions carried out by the trustee. You have no control over an irrevocable trust once it?s been created by you signing it (executed).
A popular trust is ?the living trust?. Although able to be revoked, it?s seen as a different legal entity from you ? and named accordingly. Assets you put into it are re-titled as owned by the trust ? not you. You can use it to avoid the time and publicity associated with the probate process at your death, since the probate process only deals with property in your name alone and that doesn?t automatically get transferred to another at your death.
Since the living trust is revocable by you (and therefore essentially controlled by you), the government taxes the trust?s property as if it was yours. So, living trust assets ? i.e. their earnings ? don?t avoid your annual income tax or your estate tax due to your death. It?s all taxed under your name!
Irrevocable trusts are used when it?s important that property that you put in are no longer viewed as directly controlled by you. Because of that, it?s generally taxed as the separate entity it is ? under the rules for how irrevocable trusts are to be taxed. Of course the trust document that controls how the trust will work was created by you to do what you want it to do. But once the trust is executed (signed) you can?t change it.
Incidentally, all testamentary trusts are by definition irrevocable as soon as you die. That?s because you can no longer change your will and any trust it creates.
Because estate planning concerns often deal with transferring wealth to your spouse, children and grandchildren, minimizing estate taxes, making provision for a helpless child, maintaining privacy, protecting assets, giving to charity, creating more wealth, and more, you should expect that there are trusts geared to solve one or more of these concerns. And the reason for using a trust comes from the fact that you often need an entity ? other than you or your spouse ? to hold assets, to distribute them correctly to beneficiaries you designate, and to carry out your wishes when you no longer can.
*Here are some common trusts with their attribute and purposes:
Living trust ? is revocable and intervivos trust for by passing the probate process and handling your property when you no longer are able.
Medicaid trust ? is an intervivos and irrevocable trust to receive and hold assets for a beneficiary ideally created and funded some 5 years before you, the grantor, need to qualify for Medicaid benefits.
ILIT ? is an intervivos and irrevocable life insurance trust that holds a life insurance policy whose death benefit goes directly to its beneficiaries and will not be taxed to the grantor who funded it at his death.
Charitable remainder and lead trusts ? are intervivos and irrevocable trusts to make a charitable donation to an assigned charity yet receive a tax deduction for making the donation and have use or the trust funds either during or at the end of the trust.
A by-pass trust ? is a testamentary trust to hold assets for the grantor that will be exempt from estate taxes yet able to be used for the surviving spouse while she lives with the remainder to go to child beneficiaries.
A supplemental needs trust ? is an intervivos and irrevocable trust to hold assets you put in the trust for helping a disabled child ? but not supporting him ? who is still able to receive Medicaid Assistance.
Consult a lawyer for the competent creation of a trust.
Shane Flait helps you with your financial legal, tax, and retirement goals.
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http://www.easyretirementknowhow.com/FreeReportandSignUp.htm
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