In the realm of estate planning, wills and trusts stand out as two common methods for safeguarding one’s assets. While it is essential for everyone to have a will as part of their estate plan, not everyone necessarily needs a trust.
It is advisable for individuals to commence planning their estate sooner rather than later, as no one can guarantee their presence tomorrow. There may be individuals who depend on you for their livelihood. Having well-crafted wills and trusts can assist them, but it is crucial to ensure that these documents comply with the legal requirements of the state you reside in, as these regulations can vary across regions.
Trusts offer certain benefits that cannot be immediately attained solely through wills. Some of these advantages include:
There are two fundamental types of trusts. A revocable trust permits you to retain control over the assets within the trust, allowing for the addition or removal of assets as needed, as well as changes to beneficiaries. Once assets are placed into an irrevocable trust, control over these assets is relinquished.
If your assets need to go through probate court proceedings, they may be subject to taxes as high as 40%. These taxes can significantly diminish your assets, resulting in your beneficiaries receiving a sum far lower than your original intentions.
Most states mandate a waiting period of around nine months or even longer before the distribution of assets outlined in wills. In instances where wills are contested, beneficiaries may have to wait two to three years to receive assets. Trusts typically facilitate a swifter asset distribution process, often tax-efficiently.
Trusts can ensure that assets are disseminated to the desired recipients. With wills alone, the courts may make decisions on your behalf, potentially leading to asset distribution to unintended individuals. In the absence of a will, courts may determine the destination of a portion or all of your assets.
Should you intend to disinherit someone, trusts offer more protection than wills, as they are more challenging to contest. Trust documents must be meticulously written to be effective, preferably reviewed by an estate planning attorney.
When your will and assets pass through probate court, all income and distribution details become public. In contrast, the specifics of distributions within trusts and the beneficiaries involved remain confidential. If unconcerned about the scrutiny of these records, establishing a trust to achieve this purpose may be unnecessary.
Trust documents enable you to specify in great detail how assets are to be distributed. You can establish criteria based on time, conditions, age, or virtually any instructions you wish to include in the documents.
An irrevocable trust can safeguard your assets from creditors’ claims. Assets within such a trust are no longer under your control and do not form part of your estate.
Before passing, you may lose the capacity to make decisions. In trust documents, you can provide specific instructions detailing how funds should be allocated for the care of yourself, your spouse, and your children. Additionally, provisions for charitable donations can be included.
Apart from trust documents, two other essential documents should be prepared to ensure that your wishes are carried out if you lose decision-making capacity: a financial power of attorney and a healthcare power of attorney. These documents designate someone to handle financial and medical decisions on your behalf.
According to SmartAsset, the powers granted by these documents terminate when you lose decision-making capacity. This implies that the appointed individuals cannot make financial decisions on your behalf.
Durable powers of attorney function differently, only coming into effect after you lose decision-making capacity. SeniorLiving notes that without them, the courts may appoint a guardian for you.
Wealthy individuals can use trusts to reduce federal estate taxes by placing funds into trusts. This strategy is only useful if your assets exceed the lifetime gift tax exemption threshold (which is $13.61 million in 2024).
Grantor Retained Annuity Trust (GRAT): A GRAT permits the creator to place assets into the trust and freeze their value. Assets within the trust do not appreciate, enabling beneficiaries to incur lower tax liabilities.
Intentionally Defective Grantor Trust (IDGT): This trust serves to reduce tax liabilities for beneficiaries.
WildomarProbateLaw indicates that this irrevocable trust allows creators to place funds into the trust tax-free, although they are responsible for taxes on the assets’ earnings. Beneficiaries receive the assets tax-free upon distribution since the assets have grown without incurring taxes.
Spendthrift Trust, also known as a “prodigal son trust”: Under specific instructions, trustees have discretion in determining when and how to distribute assets to beneficiaries.
Charitable Trust: An irrevocable trust set to donate to one or more charitable organizations under certain conditions or at designated times.
Qualified Personal Residence Trust: This irrevocable trust enables the creator and spouse to continue residing in the house gifted to inheritors.
Qualified Terminable Interest Property Trust: Once established, funds in the trust are used for a spouse’s life. After the spouse’s passing, the remaining assets go to the spouse’s designated beneficiaries.
Special Needs Trust: This trust allows disabled or long-term dependent children to continue receiving support without affecting their eligibility for government medical aid or social security supplemental income.
Trusts can be tailored to meet your specific needs. To ensure trusts are correctly set up in your state, consult an estate planning attorney or a lawyer specializing in wills and trusts.