Writing a will is typically the first step in estate planning. However, it doesn’t have as many advantages or cover as many issues as a trust. You may think trusts are only meant for the uber-wealthy, but there are actually plenty of ways they can strengthen your estate plan, no matter where your finances fall on the spectrum! Let’s talk about some of the basics and why a trust might be a good idea for you.
A trust is a special relationship where someone (the “grantor”) gives a third party (the “trustee”) the power to hold and manage their assets on behalf of specific people (the “beneficiaries”). This legal arrangement allows the grantor to state exactly how they want their assets to be distributed after they pass away, usually without having to go through court. Unlike wills, trusts are kept private so that the affairs of the estate are kept confidential. Additionally, for those who are exceptionally wealthy, trusts can provide many tax benefits.
Here are just a few common reasons to consider a trust.
Probate is a legal process that assesses the validity and authenticity of a deceased person’s will. Its main purpose is to ensure proper asset distribution. However, with this process comes attorney fees and long waiting periods that can be frustrating.
A trust can help your estate avoid probate. When you place your property in a trust, you’re technically no longer the owner; the trustee is. By doing this, your beneficiaries are directly given your assets after your death, which saves them the stress and expenses involved in going through probate court.
Setting up a trust can be a great way to reduce your estate taxes. By transferring asset ownership out of your name, you can avoid federal and state estate taxes. With a trust, your taxable estate is smaller
A charitable trust has its own unique tax benefits. It offers an immediate charitable income tax deduction, and it also allows the trustee to sell the assets at full market value without paying capital gains tax. It’s also important to note that because the grantor of the trust is a significant donor to the charity, they receive an income tax deduction based on their property’s fair market value.
Trusts give you more control over assets, and one of the biggest advantages is that you can manage your trust’s assets while you’re still alive. This is especially helpful when you have kids who struggle with money management or have special needs. When you create a trust, it offers control that you can rely on. You can withdraw assets if you ever need to. This offers peace of mind and flexibility should you face financial constraints.
It really depends on your individual situation. Trusts can offer many benefits such as avoiding probate, protecting your assets from creditors, and maintaining privacy. That said, trusts can also come with additional expenses and complexities that may not be necessary for everyone. If you have a simple estate plan with few assets and beneficiaries, a trust may not be the most cost-effective solution. On the other hand, if you have more complex financial needs, such as business ownership or multiple heirs, a trust could provide added security and flexibility for your estate plan.
Ultimately, it’s never a bad idea to chat with an estate planning attorney to help you decide if it’s the right choice for your unique circumstances.
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Originally published June 06, 2023