By the end of 2020, industry watchers expect trusts and estates to hold an aggregate value of $198.8 billion. That will represent a 2.9% growth over the same period.
Do you know how to protect the assets in your estate and ensure they’re passed on to the right people?
The well-being of your loved ones after you die is a critical concern for many. As a result, estate planning is vital. While most people are familiar with a basic will, your options go well beyond that.
Keep reading for seven reasons why you should consider setting up a trust as soon as possible.
Defining a Trust
A trust is a financial vehicle through which one party (the trustor) gives a second party (the trustee) power to hold assets on behalf of a third party (the beneficiary). Trusts are a cornerstone of many estate planning strategies, as they expand your options in managing assets for your loved ones.
Although the average person might think that trusts are for the well-heeled, they are not difficult to understand or set up for the average Joe.
While there are different types of trusts available for you, each of them must identify the trustor, the trustee, the successor trustee, and the beneficiary if it’s to remain valid. A declaration of trust is the primary document that will lay out the terms of the trust.
How Is a Trust Different From a Will?
Both trusts and wills work to ensure that you can preserve your assets for the benefit of your loved ones. However, the approach that these two estate planning vehicles use vary in their execution.
A will goes into effect once you die. A trust, on the other hand, can take effect the moment you create it.
A will is a tool you use to designate who gets your assets after you die. Through it, you appoint a legal representative to execute the terms of the document.
With a trust, you start distributing your assets while you are living, at death, and after you pass away. The structure of a trust will encompass at least three parties, i.e., the trustor, trustee, and the beneficiary.
When you create a will, it can only handle assets that are in your name. A trust covers the property that has been transferred to it. Therefore, you will need to put the assets in the trust’s name.
Another essential difference between these two approaches is that a will undergoes probate. That is, a court can end up overseeing its administration. On the flip side, a trust passes outside of the probate process, meaning that a court won’t have to supervise the process.
Compelling Reasons to Consider Setting up a Trust
An effective trust must be documented comprehensively, and once created, kept up to date. Here are some reasons that make a weighty case for setting up and managing a trust for your loved ones.
1. Lower Estate Taxes for Married Couples
A revocable trust can enable a married couple to take advantage of federal and/or state estate tax exclusions for both spouses.
When one spouse passes on, the assets held in a revocable trust can go towards funding a family trust, up to the amount of that spouse’s state estate or federal tax exclusion.
The assets held in the family trust can then compound without any estate tax obligations when the surviving spouse passes on.
2. Retaining Assets Within Your Family
Are you worried that if your surviving spouse remarries, the assets might end up benefiting the new family instead of your loved ones? In such a scenario, a qualified terminable interest property (QTIP) trust provision becomes a useful estate planning tool for you.
With a QTIP, the surviving spouse will still be provided for. At their death, the remaining assets of the trust can go towards the beneficiaries defined by the grantor in the trust document.
3. Control the Distribution of Assets
As a grantor, a trust gives you granular control over how to distribute your assets.
You may decide to give out assets for a particular purpose. As such, you can declare that the proceeds of a trust only go towards future college education expenses, for example.
Creating a trust also empowers you as the grantor with the capacity to make age-based terminations. That is, you can distribute the assets periodically based on age.
4. Distribute Your Retirement Assets as You Wish
If a beneficiary to a retirement account decides to liquidate it, they will incur a significant income tax obligation. To avoid this, you can rely on a trust to help you direct the distribution of such assets as planned.
You can name a properly created trust as the beneficiary to your retirement account upon your death. That will then give the trustee the power to limit withdrawals from the retirement account to required minimum distributions (RMDs) for each beneficiary.
5. Timely Access to Your Heirs
Perhaps the most compelling reason to open a trust is that it helps your heirs receive timely access to the assets. When you use a will, a state court will settle it using a probate process.
Probate processes can take up a lot of time, which causes unnecessary delays. Furthermore, the process is a public affair that becomes part of the public record and which anyone can access. Don’t forget that probate costs can also be prohibitive.
Therefore, by using a trust, you can bypass this process to ensure your heirs receive the assets efficiently.
6. Protection from Creditors
Through a properly created irrevocable trust, you can shield assets from creditors as they will not be in your name as the grantor or that of the beneficiary.
As such, assets in this type of trust can’t be part of any future claims from creditors (as long as you meet certain conditions at the time of settlement).
7. Protection from Divorce Judgment
Any asset you transfer to a properly established irrevocable trust is no longer deemed to be marital property. In light of this, such assets generally don’t get to be divided as part of a divorce settlement should a beneficiary get a divorce.
Secure Your Legacy
Taking care of your loved ones is vital, no matter your net worth. If you don’t want to wait till you die for your heirs to deal with divvying up what you leave behind, you should consider setting up a trust. Such a vehicle helps you secure your legacy while you’re still living, when you die, and even after your death.
For more than 90 years, White Nelson Diehl Evans LLP has been offering tax, advisory, and accounting services. Talk to us today for estate planning solutions that will protect and care for your loved ones.