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Understanding Trusts: An Overview

Trusts might sound a bit intimidating at first, but don't worry! This guide will break down everything you need to know in a friendly, easy-to-understand way. You'll discover how trusts can make estate planning smoother and more efficient, all without getting bogged down in legal jargon. We’ve also included a short glossary of terms used to make it even easier. Let's get started!

A trust is a strategic tool in estate planning, primarily designed to reduce estate taxes and offer various other advantages.

A trust is a legal arrangement where a trustee holds assets on behalf of one or more beneficiaries. Trusts can be customized in numerous ways, specifying how and when the assets will be distributed to the beneficiaries.

One key benefit of trusts is their ability to bypass probate, allowing beneficiaries quicker access to assets compared to those transferred through a will. Additionally, irrevocable trusts may not be included in the taxable estate, potentially lowering the estate taxes due upon death. Trust assets can pass outside of probate, saving time and court fees and potentially reducing estate taxes.

Definitions:

Grantor — the individual person who creates the trust.

Probate — the legal process of validating a will and distributing a deceased person's assets.

Beneficiaries — the individuals or entities entitled to receive the assets from the trust.

Creditors — individuals or entities to whom money is owed.

Revocable vs. Irrevocable — A revocable trust can be altered or terminated by the person who created it (the grantor) at any time. An irrevocable trust cannot be altered or terminated once it has been created, without the consent of the beneficiaries.

Appreciation — an increase in monetary value.

Key Advantages of Trusts:

Wealth Control: Trusts allow you to dictate the terms of distribution, including timing and recipients. For instance, a revocable trust keeps assets accessible during your lifetime and specifies posthumous distribution, which is beneficial in complex family situations like blended families. Legacy Protection: Trusts can shield your estate from creditors and beneficiaries who might not manage money well. Privacy and Probate Savings: Trusts can keep assets out of public probate records, maintaining privacy and reducing court fees and taxes.

Common Types of Trusts:

Marital or "A" Trust: Benefits a surviving spouse and is generally included in the spouse's taxable estate. Bypass or "B" Trust: A federal estate tax exemption is used to bypass the surviving spouse's estate. Testamentary Trust: Created through a will, it undergoes probate and may remain under court supervision. Irrevocable Life Insurance Trust (ILIT): Excludes life insurance proceeds from the taxable estate while providing liquidity. Charitable Lead Trust: Allocates benefits to a charity, with the remainder going to other beneficiaries. Charitable Remainder Trust: Provides an income stream for a set period, with the remainder going to a charity. Generation-Skipping Trust: Distributes assets to grandchildren or later generations without incurring estate or generation-skipping taxes. Qualified Terminable Interest Property (QTIP) Trust: Provides income for a surviving spouse, with remaining assets distributed to other beneficiaries after the spouse's death. Grantor Retained Annuity Trust (GRAT): Transfers appreciation on assets to the next generation while retaining an annuity.

Revocable vs. Irrevocable Trusts:

Revocable Trusts: Living trusts allow assets to pass outside of probate while keeping control with the grantor during their lifetime. They can be altered or dissolved as needed but are subject to estate taxes upon the grantor's death. Irrevocable Trusts: These move assets out of the grantor's estate, making them generally exempt from estate taxes and probate. Once established, the terms cannot be changed, and the grantor loses control over the assets. When deciding on a trust, consider state laws and consult an attorney or financial planner to ensure the trust aligns with your estate planning goals. If you are interested in speaking with a specialist about trust services at USLA, Learn more at Trust Services or call us at 765-825-2171.