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Financial Legacy Review

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Trust Planning

What Is a Trust?

In general, a trust is a legal creation that allows a trustee to hold and direct the assets that are transferred into it on behalf of a beneficiary. More specifically, a trust is a financial arrangement between three parties: The first party, the Grantor (the one who makes the trust), grants another party, the Trustee, the power to hold assets and distribute them to a third party, the beneficiary, at a designated time.

Trusts work in tandem with (not as alternatives to) wills to direct how and when beneficiaries receive your assets. Trusts greatly expand your estate planning options, whether your primary concern is tax mitigation, asset protection, or wealth transfer.

What Is the Purpose of a Trust?

Trusts are used to accomplish a wide variety of specific goals, but most trust planning objectives tend to fall into four broad categories:

  1. Estate tax minimization,
  2. Asset protection,
  3. Setting terms for accessing assets (e.g. age or amount requirements), and
  4. Directing assets and property where you want.

In addition, assets and property distributed through a trust can avoid the public, expensive, and protracted Probate process.

What Are the Types of Trusts?

There are about as many different types of trusts as motivations to use them. Since the terms and structure of trusts are flexible, they can be tweaked to suit individual needs. This has led to the creation of literally hundreds of different types of trusts.

Knowing what type of trust is best for you and your family isn’t always easy. The key to good trust planning is not to get bogged down in labels. What the trust is called is not important, but rather what the trust allows you to accomplish.

That being said, trusts can be broken down into two basic categories:

  1. Revocable (Living) Trusts
  2. Irrevocable Trusts

Revocable Trusts

Revocable Trusts provide flexibility to grantors insofar as the grantor can still benefit from the assets in the trust while they are living, and the provisions of the trust can be altered at the grantor’s discretion. Assets transferred to the trust can also avoid probate.

Pro Tip: “Revocable Trust” and “Revocable Living Trust” are used interchangeably and mean the same thing.

However, properly setting up and maintaining a Revocable Trust takes time and money. Funding a trust during a grantor’s lifetime requires reregistering securities, real property, and other assets in the name of the trust. Any property or assets not titled in the trust’s name, will still be subject to probate.

Irrevocable Trusts

Irrevocable Trusts often get vilified, but they can be very beneficial when used properly. While Irrevocable Trusts require the consent of the beneficiaries to make any changes to them, they do provide three critical benefits:

  1. Minimization of Estate Taxes: Wealthier families can fund an Irrevocable Trust with life insurance proceeds, create charitable trusts, or gift substantial property to avoid estate taxes.
  2. Eligibility for Government Programs: Disabled beneficiaries have stringent income and asset limitations and overstepping those limits can cause their government benefits to be revoked.
  3. Protection of Assets: Protecting your assets from your creditors usually requires a trust to be irrevocable. Generally, the more restrictive the trust, the more protection it provides from creditors.

Specific Types of Trusts and Their Roles

As we said above, there are literally hundreds of types of trusts. Although, some trusts and trust arrangements are more widespread than others. Also keep in mind that every trust will be either revocable or irrevocable, regardless of whether “revocable” or “irrevocable” is in the name.

Some of the common trusts that we establish include:

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Marital Trust

Allows a spouse to provide money to the surviving spouse, defer the federal estate tax until the death of the survivor, and then guarantee that when the survivor dies, the balance goes where the first spouse would have wanted.

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Spousal Lifetime Access Trust (SLAT)

A trust which transfers a married person’s assets out of the couple’s estate while allowing the non-transferor spouse to be a lifetime beneficiary of the trust.

spousal lifetime access trust
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Bypass Trust

Also known as a Credit Shelter Trust or a Family Trust. Designed to leave money to the surviving spouse or family in a manner that maximizes the estate tax exemption of the spouse who dies first.

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Age Restriction Trust

Intended to provide money to loved ones in a manner that controls the timing of distributions. For example, a daughter’s inheritance may be divided into three tranches and doled out at five-year intervals starting when she turns 18.

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Special Needs Trust

Designed to provide supplemental money to a person who is receiving government benefits (e.g. Medicaid) in such a way that the special needs person will not lose the benefits. There are two types of special needs trusts, a First Party Special Needs Trust and a Third Party Special Needs Trust.

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Asset Protection Trust

Intended to safeguard the assets inside the trust from creditors of the beneficiaries. If the grantor is also the beneficiary, several states (but not Florida) allow what is known as a self-settled creditor protection trust.

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Irrevocable Life Insurance Trust (ILIT)

A frequently used trust that provides an incredibly tax efficient way to pass on wealth with few, if any, adverse tax consequences. Designed to hold life insurance such that the proceeds are not included in the taxable estate of the insured.

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Dynasty Trust

Sometimes referred to as Generation-skipping Trusts, Dynasty Trusts are designed to provide assets free of transfer taxes to two or more generations below the grantor.

dynasty trust
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“IRA Stretch" Trust

Particularly important in second marriage situations, an IRA Stretch Trust is valuable for two reasons. First, it can guarantee that the beneficiaries of an IRA stretch the IRA out over their expected lifetimes. Second, it can also guarantee that payments be made to a spouse with the remainder going to children.

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Charitable Lead Trust and Charitable Remainder Trust

The most common types of charitable trusts are Charitable Lead Trusts and Charitable Remainder Trusts, both of which are complicated and subject to unique IRS rules. These two types are polar opposites of one another, but both are designed to provide money to charity and beneficiaries of the grantor while obtaining sizeable tax benefits.

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Qualified Domestic Trust (QDOT)

Allows the surviving spouse of a U.S. citizen who is him- or herself not a U.S. citizen to take advantage of the marital deduction on estate taxes for any assets that are placed into the trust. If a spouse has not obtained U.S. citizenship for any reason, a QDOT is the best way to preserve marital assets.

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Grantor Retained Annuity Trust (GRAT)

A Grantor Retained Annuity Trust is a trust for wealthier individuals and families who wish to make large financial gifts while limiting the estate and gift taxes.

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Pet Trust

Pets are a part of the family, but often don’t get included in the estate planning process. Setting up a Pet Trust allows you to ensure your beloved pet has all of their caretaking needs met. This is absolutely critical for exotic or expensive animals such as horses.

Trust Planning Is Part of a Full Estate Plan

Trust planning is a critical component of your comprehensive estate plan. When properly implemented it can be a fantastic way to create and build generational wealth. But because of the legal complexity and tax implications you should work with an Estate Planning attorney to ensure you achieve what you set out to achieve.

However, trust planning it is still only a part of your overall estate plan. A fulsome conversation is needed about your short-term and long-term objectives, the complex legal and tax landscape, and the full range of financial and retirement strategies that are available so that you can craft a well-rounded estate plan that truly takes into account what you want your financial legacy to be.

Proactive planning is critical to ensuring that your financial legacy is secure and that your family and assets are protected. That’s why we work hard to educate our clients and provide clear compassionate counsel to families on their trust planning and estate planning needs. We can help take the fear and frustration out of the process. Call us today at (561)998-2362 or fill out the confidential form below to schedule your free Financial Legacy Review now.

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