When it comes to estate planning, many people create a will to have their assets distributed after they pass away. But there’s another aspect of estate planning that may offer unique benefits to you and your family: a trust.
Trust is a legal contract, drafted by an attorney, with a named trustee who ensures your assets are managed according to your wishes both during your lifetime and after your death.
Here are five benefits of adding a trust to your estate planning portfolio.
While assets controlled by your will have to go through probate in order to be verified and distributed according to your wishes, trust assets usually don’t. A will becomes a part of public record, while a trust agreement stays private. When you establish a trust during your lifetime, you only need to deal with your attorney and your trustee to execute the agreement. It should be noted that you can also stipulate in your will that you want to create a trust upon your death; in this instance, your estate will go through probate prior to the trust being established.
Privacy is important if you want to keep your family’s financial matters outside of public view. Plus, by avoiding the probate process, trusts are often a quicker and simpler way to have your assets distributed when you die. You may even decide to have your will state that any assets held outside of a pre-existing trust at the time of your death transfer into the trust when you pass away. When you’re dealing with the death of a loved one — or the transfer of assets from one person to another — you likely want the change to be as seamless and private as possible. Creating a trust can help you achieve both of those goals.
Trusts can either be revocable or irrevocable, essentially meaning that they can either be amended after they’re created — or not. A revocable trust gives you the option to make changes to it after it’s signed, but, depending on its terms, it may or may not lead to tax advantages further down the line.
An irrevocable trust, however, is one that you cannot usually change after the agreement is signed. Because you’ve transferred assets out of your estate, there may be transfer tax benefits with an irrevocable trust. Contributions to the trust are generally subject to gift tax requirements during your lifetime. However, if certain conditions are met, assets placed in this type of trust (and appreciation on those assets over time) will be sheltered from estate tax after your death.
In addition to initial funding, you can make an annual exclusion gift to an irrevocable trust each year without having to pay additional gift tax on that contribution. The 2024 gift tax exemption rate is $18,000 for individuals or $36,000 for married couples filing a joint return. Speak with your trust administrator and attorney about whether a revocable trust and/or an irrevocable trust might be a good estate planning option for you and your family.
Whether you establish a trust under your will and/or create a separate trust agreement during your lifetime, trusts give you the ability to truly customize your estate plan. You can include conditions such as age attainment provisions or parameters on how the assets will be used. For example, you can state that you’d like the money in a trust to be given to your grandchildren only once they turn 18 and only to be used for college tuition. Or you might decide to limit how much money a beneficiary can receive from the trust each year if they’re someone who may need extra help managing money.
A trust is a plan to take care of the people you love when you’re no longer around or lack capacity to assist them.