Having an estate plan in place is a basic responsibility of being an adult. If you don't already have your own estate plan, now is the time to get started. It’s not just something for retirees to tackle. If you have sizable assets to pass on someday or dependents that rely on you now, a trust may be good protection to explore. In addition to having a last will and testament, many people choose to have at least one type of trust included in their estate plan.
By having a better understanding of what a trust is, why you may need one, and how to go about creating one, you can make sure your assets and best interests are protected in the event of your passing.
What is a Trust?
In a nutshell, a trust is a legally binding document that outlines who should receive property and/or other assets in the event of the trustor's passing. This can include detailed instructions regarding who will receive funds from your bank accounts, who will inherit your properties, and who will take on any other assets you may own. A trust can be used to help streamline and simplify things for your loved ones.
In understanding how
- Beneficiary - the person (or people) who will receive benefits outlined in the trust document
- Trustee - the person or people designated to carry out the wishes of the trust
- Trustor (also known as donor or grantor) - the person creating the trust
The Difference between Trusts and Wills
This is a common question, as there are a lot of similarities between the two. Unlike a last will and testament, a trust is a non-public document. This makes it an ideal option for those who want to maintain more privacy when it comes to their financial affairs after they pass.
Also, a trust doesn't typically have to go through probate—which can drastically simplify and speed up the process by which your loved ones are able to receive their inheritances.
Additionally, various types of trusts can be used to protect and transfer assets while you’re alive, with tax advantages.
Benefits of a Trust
There are many reasons to include
Some other benefits of having
- making sure your property is protected from creditors
- ensuring that your properties are managed how you want them
- optimizing the tax situation for yourself and/or your beneficiaries
What is a Trust Fund?
Essentially, this is a bank account that is opened by the trustor. In the trust document itself, you can outline how much of the money in the trust fund you want
The Two Main Types of Trusts
Now that we’ve covered some of the basics, let’s look at the types of trusts you may want to explore further with an attorney. When it comes to types of trusts, there are two main categories: living and testamentary.
A living trust refers to one that can be carried out while the trustor is still alive. For example, if you were to slip into a coma, a living trust could be used to carry out your wishes.
Living trusts can also be revocable or irrevocable. A revocable trust is one where the terms can be changed or updated at any time, whereas an irrevocable trust is permanent and cannot be changed without the consent of all beneficiaries involved.
A testamentary trust, on the other hand, is only carried out when you pass away.
Other Common Types of Trusts
While the basic types and categories of trusts are outlined above (living versus testamentary and revocable versus irrevocable), here are some other more specific types of trusts that are quite common and may apply to your situation.
Revocable Living Trusts
The single most common type of trust that many people have in place is known as a revocable living trust. The main purpose of this type of trust is being able to designate what will happen if you become incapacitated for any reason during your lifetime. If you fall into a coma, for example, a living trust can be used to ensure that your assets are managed as you want them to be. Meanwhile, the revocable aspect of
Charitable Remainder Trusts
Another common type of trust is the charitable remainder trust. The purpose of this is to allow you to make a charitable donation now rather than waiting until after your passing. The benefit of taking this route is that you'll be able to enjoy the tax deduction associated with this action while you're still alive. Meanwhile, your trust can outline how much additional money should go to the charity of your choice in the event of your passing. This type of trust is a win-win for all parties involved, making it a common choice.
If you'd like to distribute income from
Keep in mind that it is perfectly acceptable (and in some cases encouraged) to have more than one type of trust in place. At the end of the day, it's all about figuring out your needs and making sure those are covered in your estate plan.
Less Common Trust Situations
There are many types of specialized trusts that are available to suit special circumstances as well. While it's not extremely likely that you'll need to use any of these, it's helpful to be aware of them should a special circumstance arise.
These are also known as dynasty trusts, and they're ideal for situations where you may want to pass assets onto grandchildren or even great-grandchildren rather than directly to your own children. This type of trust requires beneficiaries to be at least 37.5 years younger than the trustor.
Irrevocable Life Trusts
For those with life insurance policies in place, an irrevocable
Family or Bypass Trusts
For married couples who have
Steps for Creating a Trust
Now that you have a better understanding of what trusts entail and why you should have one, it's about time to get drafting. Before you get started, there are a few tips worth keeping mind.
1. Consult a Professional Estate Attorney
With so many different trust options available, it can be difficult to know which type of trust is best for you. This is where turning to an estate-planning professional, such as an attorney, can be helpful. These professionals will be able to assess your unique financial situation and help you decide on the type(s) of trusts that will best suit your needs, giving you peace of mind as you move forward.
2. Consider Potential Tax Implications
The tax implications of
3. Understand Laws That Could Affect Your Trust
There are plenty of federal laws that come into play when it comes to legally establishing and carrying out
4. Choose a Reliable Trustee
One of the more important decisions you'll make when it comes to writing your trust (aside from who will inherit your assets) is choosing a trustee. Specifically, a trustee is the person or people who will be responsible for carrying out the wishes outlined in your trust.
A trustee can be a family member, a friend, or even a hired professional (such as an attorney or bank). There are many things you'll want to keep in mind when deciding on a trustee. Ideally, a trustee should have:
- excellent communication skills
- a basic understanding of finances and accounting
- a commitment to carrying out your trust
a strongattention to detail
Do you know anyone who fits
5. Thoughtfully Consider Your Assets and Beneficiaries
Deciding on who will receive what in the event of your passing is often the most difficult aspect of creating a trust. In making these decisions, it can be helpful to make a detailed list of your individual assets as well as a list of potential beneficiaries. From there, you can work on deciding who should receive what. Be sure to also consider charities as potential beneficiaries as well.
6. Save Your Trust in a Secure Location
Even once your trust is drafted and completed, it's important to have it saved in a secure location. Many people choose to print out paper copies of their trusts, and that's fine as long as they're kept in a safe place (such as a lock box or a physical safe). It is also recommended, however, that you save a digital copy of your trust along with the rest of your estate planning documents.
This is where the Cake platform can be extremely useful (you’re on the Cake blog now). Our end-of-life planning website makes it easy for adults of all ages to be proactive about their planning. Cake helps you create, upload, and save documents, including your complete trust, so you can share 24/7 access with loved ones. Beyond estate planning, we also help you create documents that express your final wishes for healthcare, financial, funeral, and legacy decisions.
With so many different types of trusts, the whole process of creating one can be a bit confusing. This is especially true if you'll need to create more than one type of trust to carry out all your wishes. By having a better understanding of your options, working with an experienced professional, and using a secure platform like Cake to share all your documents—you'll be in great shape! Create your free Cake account.
- "Estate Planning: Types of Trusts." CNN Money. March 24, 2017. www.money.cnn.com/pf/money-essentials-trusts/index.html
- "How Are Trust Fund Earnings Taxed?" Investopedia. February 6, 2018. www.investopedia.com/ask/answers/010815/how-are-trust-fund-earnings-taxed.asp
- Kaminsky, Michelle. "Top 5 Benefits of a Living Trust." LegalZoom. October 2016. www.legalzoom.com/articles/top-5-benefits-of-a-living-trust