Estate planning is an important component of a comprehensive financial plan that provides for you and your loved ones in the way you intended. Estate plans often incorporate trusts, which can accomplish goals such as asset and privacy protection, legacy building and more.
The three parties required to create a trust include the party wishing to establish and fund the trust, the grantor, and the party who will benefit from the trust, the beneficiary. Thirdly, a trustee is the fiduciary party that receives the trust property and administers the trust according to the grantor’s wishes, outlined in a trust agreement.
Trusts can be revocable or irrevocable. With a revocable trust, the grantor can change or terminate the trust at any point during the grantor’s lifetime. In an irrevocable trust, the grantor cannot change or terminate the trust after it is created, but a trustee may be able to modify or terminate the trust. Your advisor can guide you on which will best help you achieve your goals.
Benefits of trusts
Trusts aren’t just for the ultrawealthy. In fact, they may be beneficial for estates of all sizes and for a variety of purposes.
- Incapacity planning: Trusts can provide for the care of the grantor or family members if the grantor is unable to manage assets.
- Probate avoidance: Upon death, a will must be submitted to probate court – often becoming a public record – for approval before the will’s executor has the authority to manage assets. This process can take weeks or months and often requires an attorney. To avoid probate, a grantor can establish and transfer assets to a trust. The trust agreement does not have to be filed with the court before the trustee can administer the trust, allowing for a faster and more private process.
- Asset protection: Assets in a trust may be shielded from both the grantor’s and beneficiary’s creditors and protect against potential lawsuits.
- Flexibility: The grantor sets the terms of the trust, determining how the assets are held and used. The grantor can establish conditions and instructions to address unique family dynamics and complex financial situations, such as providing for the ongoing needs of minor children or individuals with special needs; preserving family wealth and values for future generations; or ensuring the smooth transfer of business interests.
- Reduction of estate taxes: By strategically structuring a trust, individuals can utilize the federal estate and gift tax exemption to transfer assets to a trust that is excluded from their taxable estate at death. Various types of trusts, such as irrevocable life insurance trusts or charitable trusts, offer specific tax advantages that can be tailored to individual circumstances.
A trust is a powerful and versatile tool for effective estate planning which can help ensure the orderly distribution of wealth, optimize tax benefits and protect the financial well-being of beneficiaries. We’re here to advise on your unique estate planning needs.