What Is A Trust?

A trust is traditionally used for minimizing estate taxes and can offer other benefits as part of a well-crafted estate plan.

A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries.

Since trusts usually avoid probate, your beneficiaries may gain access to these assets more quickly than they might to assets that are transferred using a will. Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death.

Assets in a trust may also be able to pass outside of probate, saving time, court fees, and potentially reducing estate taxes as well.

Other benefits of trusts include:

  • Control of your wealth. You can specify the terms of a trust precisely, controlling when and to whom distributions may be made. You may also, for example, set up a revocable trust so that the trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.
  • Protection of your legacy. A properly constructed trust can help protect your estate from your heirs’ creditors or from beneficiaries who may not be adept at money management.
  • Privacy and probate savings. Probate is a matter of public record; a trust may allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.

 

Basic types of trusts

Marital or “A” trust Designed to provide benefits to a surviving spouse; generally included in the taxable estate of the surviving spouse
Bypass or “B” trust Also known as credit shelter trust, established to bypass the surviving spouse’s estate in order to make full use of any federal estate tax exemption for each spouse
Irrevocable life insurance trust (ILIT) Irrevocable trust designed to exclude life insurance proceeds from the deceased’s taxable estate while providing liquidity to the estate and/or the trusts’ beneficiaries
Charitable lead trust Allows certain benefits to go to a charity and the remainder to your beneficiaries
Charitable remainder trust Allows you to receive an income stream for a defined period of time and stipulate that any remainder go to a charity
Generation-skipping trust Using the generation-skipping tax exemption, permits trust assets to be distributed to grandchildren or later generations without incurring either a generation-skipping tax or estate taxes on the subsequent death of your children
Qualified Terminable Interest Property (QTIP) trust Used to provide income for a surviving spouse. Upon the spouse’s death, the assets then go to additional beneficiaries named by the deceased. Often used in second marriage situations, as well as to maximize estate and generation-skipping tax or estate tax planning flexibility
Grantor Retained Annuity Trust (GRAT) Irrevocable trust funded by gifts by its grantor; designed to shift future appreciation on quickly appreciating assets to the next generation during the grantor’s lifetime