What is a Trust?
By Lightship | June 4
Our clients often ask would happen to their assets upon death, incapacity, transfer, or bankruptcy. We usually respond with an “it depends”, but at some point the conversation usually evolves into a discussion of trusts. A trust essentially helps you accomplish many estate planning goals. The power of a trust is in its versatility–many types of trusts exist, and each is designed for a specific purpose.
Living Trust
A living trust (also called an inter vivos trust) is a trust you create during your lifetime rather than after your death by the terms of your will (that type is called a testamentary trust). Living trusts are revocable–you keep control over the trust assets, and can change the trust or even dissolve it at any time. This type of trust is useful if you want assets to avoid probate and shield them from public scrutiny, and/or if you want to provide for someone else to manage your assets should you become incapacitated. Living trusts, however, will not minimize taxes or protect assets from creditors.
Irrevocable Trust
An irrevocable trust is one that, once created, you generally can’t change or dissolve, and you must give up total control over the trust assets. On the other hand, an irrevocable trust can provide certain tax advantages and asset protection. The following are all irrevocable trusts designed to achieve particular objectives:
Bypass Trust
When a person leaves his or her entire estate to a surviving spouse, assets pass free from federal estate tax because of the marital deduction.
QTIP Trust
A QTIP (qualified terminable interest property) trust (also called a marital deduction trust) is, like the bypass trust, used by spouses to minimize estate taxes. For maximum estate tax savings, a QTIP trust is often paired with a bypass trust. Because the first spouse to die names the ultimate beneficiaries, a QTIP is often used to provide for children of a previous marriage.
Irrevocable Life Insurance Trust (ILIT)
The proceeds of your life insurance policy will be subject to federal estate tax if you own the policy, or your estate receives the proceeds. Often, this asset pushes an estate over the exemption amount.
Charitable Remainder Trust
A charitable remainder trust allows you to give money or property to charity while continuing to receive income (fixed or variable) from the property for life or for a period of time up to 20 years. You and/or other beneficiaries receive distributions from the trust annually, and the charity receives the remaining assets when the trust ends. You get an immediate income tax deduction for the charitable interest (subject to limitations), as well as gift and estate tax deductions. You also avoid capital gains tax on the donated assets.
Trust a Team
If your head is spinning, don’t worry. A trust is not a do-it-yourself arrangement. Trusts should be properly structured and carefully drafted to achieve the desired results for your specific situation. Be sure to consult an experienced financial or legal professional to implement the best solution for you.
