In estate planning, the primary goal of creating a trust fund is usually to reduce estate taxes and to avoid probate so that a prominent percentage of your wealth may be transferred to your heirs.
Probate is a legal process wherein assets are accounted for and distributed to a person’s heirs from his or her estate after they pass away. Probate can be lengthy and expensive, but those costs can be avoided with a properly drafted and funded trust.
What is a Trust Fund?
Think of a trust fund like a basket. A person puts things into the basket such as real estate, art, or other assets. That person is called the grantor or trust creator.
Another person or a designated institution may manage what’s in the basket after the grantor passes away or becomes incapacitated. This person or institution is called the trustee. The trustee’s job is to make sure that everything in the basket is accounted for and gets taken out of the basket according to the grantor’s wishes.
The third person involved in this legal relationship is known as the beneficiary. This person receives some of the benefits that have been placed in the basket.
A trust, simply stated, is a legal mechanism through which one party (the grantor) entrusts another party (the trustee) with the holding of property for the benefit of a third party (the beneficiary).
Types of Trusts
Whether you are named in a trust as a beneficiary, the trustee, or planning to establish a trust of your own, understanding the differences between the common types of trusts is crucial. Essentially, all trusts can be categorized into two fundamental categories:
- Living Trusts– trusts created and operative while the person who created the trust is alive.
- Testamentary Trusts– trusts established after the death of the grantor and based on his or her last will and testament.
Living trusts can then be further divided into:
- Revocable trusts; and
- Irrevocable trusts
Revocable trusts are an essential part of basic estate planning. They are established during the grantor’s lifetime and can be altered or revoked by the grantor while they are still alive and of sound mind.
An irrevocable trust cannot be undone and will exist the same as it was when it was established. Irrevocable living trusts are used most often in more complex estate planning, usually to minimize gift and estate taxes on large estates or to provide for young children or incapacitated adults.
Other Types of Trusts
There are many different types of trusts that can provide asset protection and tax advantages for your family. Some offer control over how and when your assets will be distributed to your heirs. Others create tax advantages by positioning your assets outside of your taxable estate.
Here is a list of some of the most common types of trusts used in estate planning today:
- Irrevocable Life Insurance Trusts
An irrevocable life insurance trust (ILIT) takes your life insurance policies and moves them outside of your taxable estate and into a trust that can provide funds to your family, reduce estate taxes, and increase the possibility of wealth transfers to future generations.Special Needs Trusts
The best way to ensure that a disabled family member will be provided for after you are gone may be to create a special needs trust. With a special needs trust, rather than having your assets passed directly to a child or adult with special needs, they are instead placed into a trust. This allows the assets to be managed and provide the beneficiary with supplemental or additional care. At the same time, the beneficiary maintains his or her eligibility to receive government support, like Medicaid and Medicare.
- AB Trusts
An AB trust, also known as a Credit Shelter Trust or Bypass Trust, allows wealthy couples to avoid estate taxes while passing on their assets. The trust is structured so that upon the death of a wealthy individual, assets are transferred to the beneficiaries named in the trust—usually their children—while allowing the decedent’s spouse to maintain rights to the trust’s assets and the income it generates for the remainder of his or her life. An AB trust can be an excellent way for you and your spouse to take full advantage of estate tax exemptions.
- Charitable Remainder Trusts
Charitable remainder trusts are irrevocable trusts that allow philanthropic individuals to receive income and certain tax benefits and then upon expiration of the trust, donate the remaining assets to a charitable cause.With a charitable remainder trust, you can transfer assets to the trust for a specified number of years or until you die. Each year you can receive income from the trust. Then, at the end of the trust term, the remaining assets of the trust are distributed to charitable organizations of your choosing.Charitable remainder trusts are ideal for individuals who wish to reduce their taxable income, dispose of highly appreciated, low yielding assets free of capital gains taxes, and give to their favorite charities as well.
Contact Estate Planners of Arkansas, P.A.
This information is intended to help you understand your options concerning the creation of a trust and to prepare you for an efficient and productive conversation with an experienced estate planning attorney. It is always best to talk to an experienced attorney who specializes in trusts when deciding which type of trust is best for your estate planning goals.
For advice on what type of trust is best for you, or for any other estate planning needs, call Estate Planners of Arkansas, P.A. at 866-227-8165, or contact us here to arrange a free consultation with a reputable Arkansas estate planning attorney.