A good estate plan helps to ensure the smooth passage of a person’s assets to his chosen beneficiaries after his death. In the absence of estate planning, it is common to find family members fighting among themselves, facing a higher tax burden, and paying steep probate costs. While one can always make a simple will, more advanced estate planning will invariably involve setting up one or more trusts.
Some Defining Characteristics of Trusts
Broadly, trusts are of two types; revocable and irrevocable. You can change the terms of a revocable during your lifetime; however, you cannot make any alterations in case of an irrevocable trust. Since trusts need to pay taxes separately, they need a federal identification number and file taxes annually. A trust can hold any kind of asset, including cash, real estate, stocks and bonds, jewelry, etc.
Common Types of Trusts
Living trusts: A grantor can create this trust by transferring property to a trustee. However, the grantor retains the right to change or terminate the trust. However, the trust cannot be changed or revoked after the grantor dies. Living trusts have several advantages like healthcare/end-of-life provisions as per the desire of the grantor, protection against his incapacity, the reduction, or elimination of delays, and expenses of probate of a will. A Living trust is one of the most popular among the different kinds of estate plans.
Testamentary trusts: A grantor can create a testamentary trust by providing for it in his will. Using a “trust under will”, as it is also called, you can preserve assets for children born from an earlier marriage; provide lifelong income to a spouse, take care of beneficiaries with special needs, give to charities, etc.
Irrevocable life insurance trust: Setting up this kind of trust permits advanced tax planning for estates not enjoying tax exemption. According to Forbes, a life insurance policy funds the trust and allows the trust to benefit while owning it. The grantor’s heirs remain beneficiaries of the trust but the grantor must not die within three years from the transfer of the policy to the trust.
Charitable remainder trust: Transferring appreciated assets like real estate and stocks to the trust helps plan estate taxes effectively. Donors can sell the appreciated assets without incurring capital gains tax. Charitable remainder trusts are irrevocable and the grantor does not have any rights of ownership to the assets in the trust.
Qualified domestic trust; It is a special type of trust create to permit non-citizen spouses. To get the marital deduction allow to other married couples. Normally, the surviving spouse does not pay any taxes on the death of the other spouse. However, this deduction is not allow if the surviving spouse is not a US citizen.
Special needs trust: You can create this type of trust for a chronically disabled or physically or mentally ill person. It allows them to benefit from the benefits of public assistance programs that have specified restrictions on income and assets.
Estate planning is a critical function and must be carefully for maximizing the benefits. Choosing the right kind of trust is integral to the process. You must consult a competent tax planning professional before establishing a trust.