A properly drafted estate plan assures that assets will be passed smoothly to children and beneficiaries if you pass away. Family conflicts, high tax burdens, and outrageous probate costs can arise without an estate plan. While a simple will is crucial in the estate planning process, detailed estate plans should feature trusts. Below is a highlight on estate planning trusts you should know.
The Basics of Trusts
Trusts are separate entities that reserve different assets and properties for future inheritance by your beneficiaries or heirs. Trusts can sometimes be as simple as a trust fund and other retirement options that provide income to your beneficiaries. As you draft your trusts, you should understand the following;
- Grantor or trustor – The person who creates and funds the trust
- Trustee – The person assigned to manage the trusts
- Trust beneficiary – Heirs who receive the trust assets
- Property – Assets moved to the trust. May include securities, real estate, vehicles, cash, artwork, and more.
If the grantor dies, beneficiaries receive the property or assets outside probate. However, probate may be necessary if some heirs contest the will.
Main Types of Trusts
Trusts are categorized as follows:
1. Living and Testamentary Trusts
Living trusts, also called inter Vivos trusts, are created by the grantor while still alive. The main goal of living trusts is to ensure the efficient transfer of properties and assets, such as private homes, to heirs or beneficiaries. A living trust achieves this by avoiding possible probate processes, which are court proceedings for assets distribution after death. Avoiding probate processes saves time, avoids court fees, and may reduce estate taxes.
Testamentary trusts are created once the grantor dies according to instructions in the person’s will. Asset transfers cannot be done until the will is verified and proved by a court of law. Unlike living trusts, testamentary trusts are irrevocable since the grantor isn’t there to change the will. Testamentary trusts are cost-saving since you won’t have to maintain them while still alive.
2. Revocable and Irrevocable Trusts
Revocable trusts are living trusts that are also created when the grantor is alive. The grantor can change the terms of this trust. Like living trusts, the main goal of revocable trusts is to avoid probate during the transfer of assets.
Terms in irrevocable trusts cannot be changed. You should opt for irrevocable trusts if you want to transfer assets out of your taxable estates. The benefactors won’t be taxed income from the estate, and assets won’t be taxed if the benefactor dies. Other types of trusts include:
- Charitable remainder trust
- Qualified domestic trust
- Special needs trust
- Irrevocable life insurance trust
- Spendthrift trust
- Special needs trust
A detailed trust is an excellent estate planning tool that has many benefits. However, trusts are complicated, and setting them up might be challenging. If you have complex trusts, including large estates and properties, you should consult a Huntsville estate planning attorney to help set up their trusts.