What are Trusts?
A trust is a legal arrangement designed to protect wealth and assets during your lifetime and pass them along to beneficiaries after your death, or at a pre-appointed time of your choosing. There are three types of people involved in a trust:
Settlor/Grantor – the person who creates the trust
Trustee – the person assigned to administer the trust, like an attorney or a trusted family member
Beneficiaries – the people (or entities) you name to inherit wealth and assets held in trust
The way a trust works is that you essentially transfer ownership of your assets to the trust. During your lifetime, you may retain use of these items, but the trust essentially owns them and is holding them until the appointed time, when they will be passed along to their new owners (your named beneficiaries).
The bulk of the trust is nothing more than a set of instructions for how the trust and its assets are to be managed. These instructions include how the assets are to be used in the event you become incapacitated or have passed away. This allows you the ability to continue to use property and assets throughout your life, including periods of incapacity or when need care down the line. More importantly, trusts allow you to ensure that wealth and assets go directly to your chosen beneficiaries in the way you want it to be distributed.
Setting up trusts can be complicated, which is why it’s so important to discuss your goals and wishes with a qualified estate planning attorney like the experts at Curtis Law Firm. This will ensure that your trust is structured according to your specific needs and unique situation.
Types of Trusts
There are a wide variety of trusts to explore, but the two main categories are revocable and irrevocable trusts. Revocable trusts protect assets while the trustor retains control of them.
The main benefit of the revocable trust is that it allows for changes during the lifetime of the Settlor and can be dissolved if the Settlor chooses. There is no need to register the trust or for the trust to obtain its own personal tax ID. As far as the IRS is concerned, the trust and the Settlor are the same entity. But, that means items held in trust are still subject to personal taxation, just as if they weren’t in the trust. An irrevocable trust, on the other hand, is non-modifiable (no changes can be made), must be registered, and must obtain its own individual tax ID. Since the trust is considered a separate legal entity from the Settlor, the Settlor no longer pays personal tax on items held in the trust. The trust will pay taxes on any capital gains.
Benefits of Trusts
There are many benefits of trusts. Trusts can be used to protect assets from creditors. Since the items held in trust are not technically in your name, it is possible to draft the trust in such a way to protect those assets from creditors to pay debts. Trusts also ensure that items go directly to intended beneficiaries, protecting them, as well. For example, if an adult child divorces, the trust can ensure that an ex-spouse has no claim to the wealth and assets held in that trust. In addition, trusts can help to avoid anticipated fights over assets after your death.
There’s also no probate with trusts. Whereas items passed on through a last will and testament must go through the probate process. Since trusts bypass the probate process and go directly to beneficiaries, your heirs can not only enjoy your gift to them quicker than if it went through probate, it also protects that gift from any creditors which may file a claim against your estate in probate. Unlike a will, the provisions in trusts need not be made public, which may help to avoid claims and contestations, and there won’t be any probate costs associated with passing them on.