A trust can be a very useful estate planning tool, particularly because they can help you to minimize estate taxes and possibly avoid probate. Trusts are essentially fiduciary agreements, meaning they are built on trust and confidence, between the grantor (the person making the trust) and the trustee. The trust agreement gives the trustee the authority to manage the trust assets, including distributing the trust assets to the named beneficiaries as instructed by the trust document. There are many different types of trusts to choose from. Our Sacramento trusts attorneys will discuss those types and the benefits you can expect.
Why a trust is generally useful
Much like your last will and testament, a trust is used to control your property, including when and to whom your assets will be distributed at the appropriate time. A trust can also offer protection in cases where a particular beneficiary may not be savvy when it comes to managing their own money. Creating a trust may also mean that your estate will be able to avoid the lengthy and expensive probate process, which is also open to the public. If these are some of your goals, then discuss your options with us.
The benefits of using a revocable trust as part of your estate plan
When it comes to trusts, they are typically categorized as either revocable or irrevocable. This is a very important distinction because these two types of trusts operate very differently. A revocable trust gives the grantor a way to modify the terms of the trust, or revoke the trust altogether, at any point before the grantor’s death. After the grantor’s death, however, the trust will be considered irrevocable. A revocable trust is flexible because it can be modified in order to address the changes in your circumstances or intentions. With revocable trusts, the person you select to serve as trustee will not take control of the trust property until after your death or if you become incapacitated.
The benefits of using an irrevocable trust instead
In contrast, an irrevocable trust cannot be modified by the grantor once it has been created and executed. This can be very helpful, though, because it means the trust assets remain out of the reach of creditors and legal judgments. That aspect of an irrevocable trust provides valuable asset protection. Properly established irrevocable trusts are not subject to estate taxes, either. So, depending on your circumstances, relinquishing control over your assets when they are placed in an irrevocable trust, can be worth it.
What is an A and B trust structure?
Married couples often choose to create and A and B trust structure when creating their estate plan. The A Trust, sometimes referred to as the survivor’s trust, provides benefits to the surviving spouse while including the trust assets in the taxable estate of that spouse. Then the B Trust, or bypass trust, effectively bypasses the surviving spouse’s estate for the benefit of the children. By using this A-B trust structure, married couples can benefit the most from the federal estate tax exemption for each spouse, which is currently $5.49 million.
The benefits of creating Charitable Trusts
A charitable trust is simply one that names a charity as the beneficiary. There are two basic types of charitable trusts: a Charitable Lead Trust and a Charitable Remainder Trust. The difference in these two types of trusts is who receives what, when. With a Charitable Lead Trust, specific assets got to the charity you choose, and the remainder goes to your beneficiaries. A Charitable Remainder Trust works the other way around. The grantor of the trust receives a certain amount of income from the trust for a specific period of time. Then any remaining assets will go to the charity you choose.
A few other trust options to consider
There are a few other types of trusts commonly used in estate planning. For instance, an Irrevocable Life Insurance Trust (ILIT) is designed to remove proceeds from life insurance policies from your taxable estate. They also provide liquidity of assets for the estate and the trusts’ beneficiaries. Generation-skipping trust, in combination with the generation-skipping tax exemption, permits trust assets to be distributed to the future generations while avoiding the generation-skipping tax being imposed.
A Qualified Terminable Interest Property (QTIP) trust is most commonly used to provide income for the surviving spouse. When the surviving spouse dies, the remaining assets go to the beneficiaries named in the trust. This type of trust is most common when there is a second marriage. A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust that is funded by gifts from the grantor. The purpose of this type of trust is to shift future appreciation on assets that appreciate more quickly to the next generation.
If you have questions regarding trusts, or any other estate planning needs, please contact the Northern California Center for Estate Planning and Elder Law, either online or by calling us at (916) 437-3500.
- Estate Planning for Same-Sex Couples: Key Considerations - March 21, 2023
- The Role of Trusts in Estate Planning - March 19, 2023
- The Not-So Transparent Corporate Transparency Act - March 17, 2023
