A Guide to Finding the Right Type of Trust
It’s critical to know how trusts and will differ, so you can choose the one that best suits your financial goals. It’s also vital to understand the differences between testamentary trusts and living trusts and the distinct features of revocable and irrevocable trusts. In addition to helping you rid yourself from probate and obtain tax benefits, they may also help you safeguard your property from your creditors and exert control over them. Here are a few things to take note of:
- What is the definition of trust?
- Which kind of trusts are there?
- Requirements for forming a trust
- Get an attorney who specializes in estate planning.
We will go through the fundamentals of trust to help you build one.
What is the definition of trust?
To maintain assets for the benefit of a single or group of beneficiaries, an investment contract called a trust is established with the involvement of a third person, known as a trustee. The person or entity who makes the trust is the trustor, settlor, or grantor, depending on who sets the trust.
The settlor of an irrevocable trust may be seen as a benefactor by the trust’s beneficiaries. Since they allow assets to be transferred from one party to another, trusts are frequently employed in estate planning.
Many alternative arrangements can be established inside trusts because there are many types of trusts to select from. For example, which forms of trust you should use depends on your aims and interests.
Testamentary Trust vs. Living Trust
To better comprehend the different types of trusts, let’s make some comparisons.
The way the two types of trusts are named indicate how they are created:
A testamentary trust is created after your death in your final will and testament. A testamentary trust is more flexible and straightforward compared to a living trust. This is because its rules are based on your living will, and you may amend the conditions of a testamentary trust any time before your death.
A living trust can also be called an inter vivos trust. This is established while the grantor is alive. A living trust’s ultimate aim is to move assets to subsequent beneficiaries as quickly as possible. Making a living trust rids you of the need to face probate, which is a fully court-supervised procedure for transferring assets after the grantor’s death. This saves both money and time for the beneficiaries. Preventing a will from going to probate can save the beneficiary time in court and money on estate taxes.
The Distinction Between Revocable and Irrevocable Trusts
There are two types of trusts: irrevocable and revocable, each with its pros and cons. The following are the foundations of irrevocable and revocable trusts and the common differences between them.
A “revocable trust” is one that the grantor creates while they are still living. The name of the trust reflects the fact that the grantor’s intentions may change while they are still alive. When assets are transferred after a person’s death, the main goal of a revocable trust is to eliminate the necessity for probate.
Irrevocable Living Trust
Unlike a revocable trust, an irrevocable trust may have its provisions altered after it has been established. An irrevocable trust’s principal purpose is to provide the trust’s founder to remove assets from their taxable estate. In the benefactor’s lifetime, the earnings from the resources are not taxed anymore, and this remains the case after they die.
Which kind of trusts are there?
Four forms of trust exist:
- living trusts
- testamentary trusts
- revocable trusts
- irrevocable trusts.
There are several sub-divisions inside each trust, with their conditions and advantages.
Most trusts used in estate planning fall under one of the categories listed. It’s hard to make an educated selection without understanding the number of trusts that exist and bespoke arrangements that are most appropriate for your specific situation.
Trusts for the Benefit of Charities
A charitable trust is classified as an irrevocable trust and created for the benefit of the trust founder, their beneficiaries, and a qualifying charity as defined by the IRS, according to general criteria. A popular kind of charitable trust is a charity-lead trust (CLT), which is followed by a charitable remainder trust (CRT) (CRTs).
Trust for Charitable Purposes
Using a charitable lead annuity trust (CLAT), donors can offer long-term financial help to a charity of their choice by purchasing annuities. Whatever is remaining of the assets are eventually allocated to the beneficiaries.
Remainder Trust for Charitable Purposes
This trust is often referred to as a charity remainder annuity trust (CRAT) and works in the reverse direction of a charitable lead trust (CLT). A CRAT may produce income for both you and your beneficiaries in return for an annuity for a predetermined period, and the leftover assets are given to charity.
Qualified Terminable Interest Property (QTIP) Trust
A QTIP trust is set up when a spouse passes away to give the surviving party income while the grantor still has authority over assets. There may be advantages to using QTIPs when the beneficiaries from a prior marriage are involved, and the donor dies before the surviving spouse.
Grantor Retained Annuity Trust
You can decrease the total of taxes owed on significant financial contributions given to loved ones or any other beneficiaries by using a grantor retained annuity trust (GRAT), an irrevocable trust created specifically for this reason. As soon as the trust is established, the trustee pays the assets’ taxes and obtains an annual annuity payment. If any assets are left after a certain period, they are distributed to the intended recipients as stipulated.
Irrevocable Life Insurance Trust
Irrevocable Life Insurance Trust (ILIT) is a kind of irrevocable life insurance trust. Even though life insurance profits are typically excluded from probate, in the event of a rich person’s death, it may include some benefits from a life insurance policy for tax purposes. While keeping life insurance proceeds from taxable estates, an ILIT can also help ensure that the death benefit is delivered to the specified beneficiaries as quickly as possible.
Irrevocable Funeral Trusts
Irrevocable Funeral Trusts are trusts that cannot be revoked.
Creating an irrevocable funeral trust allows money to be set aside for funeral and burial costs when needed. It is possible that the funeral home will be requested to play the role of a trustee in rare instances. Bonds, life insurance, and cash are the most common financial resources utilized to fund funeral trusts. Considering that state laws may vary, you may want to consult an experienced estate planning attorney in Vancouver about the options you have in mind.
A spendthrift trust is designed to preserve heirs’ inherited assets because they may become financially irresponsible. Since the trust owns and administers the trust assets, neither the beneficiary nor the beneficiary’s creditors have access to them. The trustee can dictate how and why the assets must be divided, but only within specified parameters. The trustee, for example, can decide to have a yearly monetary sum or how the funds will be utilized.
Special Needs Trust
Like a spendthrift trust, this trust gives the trustee the right to choose and manage how to use the assets to support a beneficiary with special needs. This is frequently utilized for dependents with special needs, like a disabled parent, sibling, or disabled child, who cannot support themselves due to financial or other circumstances.
A generation-skipping trust skips over the grantor’s offspring in favor of the generation that follows. For example, to secure your grandkids’ financial stability, you can establish a trust which will be passed on to them, as they are named your heirs after you die.
These are simpler to set up and provide beneficiary access to the assets as soon as the grantor passes away. The grantor has the power to make additions and withdraw from their trust throughout their lifetime. The donor may also alter the recipient if they believe it beneficial.
Once it concerns estate planning, several reasons exist as to why you should have a trust. Listed below are a handful of some often cited advantages:
Helps you steer clear of the probate process
Assets given to beneficiaries are sometimes subjected to probate, a lengthy and costly judicial process. By eliminating probate, you can save your heirs a lot of money and time while protecting your family’s privacy.
You have privacy
Because trusts do not have to become public documents, they may help you preserve your privacy.
You save costs
Certain trusts permit valuables to be moved from an estate, possibly saving the heirs a substantial amount of money for both gift and estate taxes.
Makes sure your assets are protected from creditors
In the same way that bringing assets to your estate might limit creditors’ access and safeguard from judgments towards you, transferring assets from your estate may have the same effect.
Assets are well inherited and distributed
Setting expectations for your trust allows you to choose whom you want to pass your assets to and when to do it after your death.
You get to choose your successors
Should you wish to make your children the heirs of your life insurance payout, you can do so by creating a trust.
Requirements for Forming a Trust
A trust should abide by three conditions, usually called “the three certainties,” to be correctly and legally formed:
Intent to create a trust
A formal declaration by the settlor is required before transferring trust assets from settlor to trustee, who will keep them for the benefit of beneficiaries.
Identify a specific property to be put in the trust
For a trust to be deemed lawful, the property that makes up the trust must be identified without ambiguity. To be a successful estate trustee, they should clearly define the assets they will manage on the authority of the beneficiaries.
A valid trust purpose
For a trust to be deemed valid, the trustee must quickly determine the trust’s purposes (beneficiaries).
The assets stay the property of the prospective settler if any of these requirements are not fulfilled. All three conditions must be met before you can establish a trust.
Get an attorney who specializes in estate planning.
A trust is an effective estate planning tool because of the numerous advantages it offers. However, trusts can get quite complicated and aren’t suitable for every individual seeking financial protection. It’s crucial to speak with an experienced estate planning attorney in Vancouver about the numerous benefits of trusts to determine the right choice for your estate planning needs.
We have some of the finest estate attorneys here at Robert Russell Law Office. Call us right now at (360) 953-5743 to get started on estate planning. Our Vancouver estate planning law firm provides consultation for free and a handful of the most reliable legal advice!