The Basics of Trusts in Estate Planning

Estate planning helps you establish the kind of legacy you want to leave behind while also helping your loved ones after you’re no longer there to offer financial support. Most people are aware of how wills work, but not everyone knows trusts can be an important estate planning tool. Trust attorneys can help you set up trusts, but what are they?

At William C. Roof Law Group, our Orlando estate planning attorneys offer some insight into trust basics. Learn how to create a trust and why you should consider adding one to any plans you’ve already made.

A trust is a legal agreement permitting a trustee or a third party to manage assets on behalf of beneficiaries. But how does a trust work? A trust essentially allows you to transfer assets to an account that you can manage or that you can allow others to manage.

One of the crucial trust basics you want to remember is that because the assets that you place in a trust don’t have to go through probate on your death, it can be a way of helping your beneficiaries access property and funds more easily and rapidly. Oftentimes, trust assets are also not considered part of the taxable estate.

Trust basics you want to remember also include knowing the key players in the process. The person who creates the trust is a settlor or grantor. Grantors decide how they want to transfer assets to the trustee.

What is a trustee? The trustee is the party who will hold the assets for the beneficiaries of the trust. Beneficiaries are the ones who will inherit the assets. It’s often possible to be a co-trustee of your own trust. The trustee has a fiduciary responsibility to manage and hold the assets based on the grantor’s wishes.

It’s possible for one person to be all three of these as long as they’re not incapacitated. If they become incapacitated, however, and can no longer manage the trust, a successor trustee will take over.

Trust basics you want to be aware of also include knowing the many types of trusts that are available. There are a few, beginning with revocable or irrevocable trusts.

A revocable living trust allows you to make changes or end the trust during your lifetime. It offers the chance to help your assets bypass the probate process after your death while still giving you control over those assets. Keep in mind that revocable trusts typically do not offer estate tax exemption benefits.

Irrevocable trusts require that you transfer the assets out of your control. This means that estate taxes don’t apply to them and that they’ll not need to go through probate court. However, you won’t be able to make changes to the trust. You can’t dissolve it, either.

A credit shelter trust, sometimes called a family trust or a bypass trust, allows you to bequeath an amount that meets the estate tax exemption limit. It’s an option suitable for many affluent, married couples. You would take full advantage of the estate and gift tax exceptions and place those assets in a trust so that when you die, they’re not added to your surviving spouse’s taxable estate.

Insurance trusts are irrevocable trusts that take a life insurance policy and shelter it so that it’s not part of your taxable estate. You can’t borrow against that policy once you place it in the trust, and you can’t make changes to it, but your family can still use it to pay estate costs once you die.

A testamentary trust is one that’s created as part of a last will and testament. You would leave instructions in your will that your executor would have to follow to manage your assets. The trust itself is created after your death. It can be a good option if you have minor children and other family members who will inherit estate assets.

A special needs trust is a good choice for someone who receives government benefits, including Social Security disability benefits. By forming this trust, you can receive income without having to stop getting government assistance.

To avoid federal estate taxes, many people opt to create charitable trusts. A charitable remainder trust, for example, will distribute assets to your beneficiaries for a specific period of time, and whatever is left over will go to the charity of your choice.

A spendthrift trust helps to protect the assets it shelters from creditors. An independent trustee manages the assets and the terms of the trust forbid beneficiaries from selling their interest in the trust.

Trusts have numerous advantages when you add them to your estate planning strategies. One of the most important trust basics is that they can help avoid probate. Probate takes time and can cost your loved ones a significant amount of money, so being able to bypass it is important.

You also want to keep in mind that your will is a public record, but a trust document is private. That, too, can help reduce issues that can end up prolonging the probate process because you can keep your family’s finances private.

A trust can help you avoid some tax liabilities. This is especially the case with irrevocable trusts, which can shelter the assets you place in them from federal estate taxes. Certain trusts may even help protect you from income taxes as well.

Trusts also provide very specific parameters in which your assets can be used. For example, if you want to create a trust fund for a grandchild but want to ensure that they use the funds responsibly, you can require that they receive the funds at a certain age and only to pay for college tuition. You can also set a limit on how much money the person can receive each year from the fund.

Setting up a trust isn’t always a simple process, so why do people choose to do so? As mentioned above, they have a number of benefits, and they can be helpful in many situations. 

Often, people choose to set up trusts to protect assets, while others decide on trusts to ensure dependents, including those with disabilities, can continue to receive the financial support they need for the rest of their lives.

Even if you have a will, you want to consider a trust. These offer added protections for your beneficiaries while also saving them from the time-consuming probate process.

These trust basics can show you just how important trust funds can be for you and your loved ones. They give you flexibility while offering asset protection so that your beneficiaries can benefit from what you leave behind.

It’s essential that you hire estate planning trust attorneys to create a trust. The process is complex, and the many options available can make choosing the right trust fund overwhelming. At William C. Roof Law Group, we can help you with this important estate planning step. Contact our team to schedule a consultation.

The contents of this article are not comprehensive, they provide only a general overview of the subject matter discussed. This article does not establish a client-attorney relationship with the reader, and no legal decisions should be made based on the article’s contents. Because every legal matter arises under unique facts specific to the client, no legal decision should be made without consulting a licensed attorney.