For those lucky enough to have substantial assets packed away, it’s important to create a plan to ensure your funds last long after you’ve departed. Not only is estate planning crucial to having your final wishes carried out properly, but, if you have assets to distribute to heirs, you want to make sure everyone gets what they’re supposed to. Here, we’ll dive into the main types of trusts for estate planning to help you determine which may be right for your situation.
If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.
What is a Trust?
Like a will, a trust is a legal document containing our wishes upon death. But unlike a will, a trust is geared toward more complicated types of financial situations. A trust will bypass probate court and prevent your assets and finances from becoming public record. Additionally, trusts are more difficult to challenge and provide greater security, although they are more costly to set up and maintain.
A trust acts as an account in which one person (a trustor) places their assets into. The trust is managed by a trustee (or several trustees) in accordance with the wishes of the trustor. Trusts also have beneficiaries, who would be the heirs receiving the assets. The trustor is the only person who can transfer assets into the account and the trustees must act as fiduciaries.
Trusts can be used to transfers several different types of assets, including:
- Bank accounts
- Stocks and other investments
- Business equity
- Life insurance policies
- Valuables and collectibles
Trusts can be used to bypass probate court and get assets in the hands of beneficiaries more quickly. But trusts can also be leveraged for very specific financial situations, which is why several different types of trusts exist.
Types of Trusts
Trusts have a number of benefits when it comes to estate planning, but it’s important to pick the right one. If you have a unique situation that must be accounted for in your final wishes, make sure you utilize the most appropriate form of trust. Here are some of the most common varieties to choose from:
Revocable vs Irrevocable Living Trust
All trusts are either revocable or irrevocable. A revocable living trust is one that can be amended or altered throughout the course of the trustor’s life. If you get remarried and want to change your trust’s guidelines to leave assets to your new spouse, a revocable trust will allow you to do that. You can even dissolve the trust entirely if you choose. An irrevocable trust cannot be changed—once the agreement is set, you cannot alter it. Irrevocable trusts are often used to shield assets from creditors who would seek recompense after the trustor passes.
Special Needs Trust
If you leave substantial assets to an heir or child with a disability, you may accidentally remove their eligibility status for certain government benefits. By establishing a special needs trust, you’ll ensure that any disabled beneficiary under the age of 65 won’t be penalized for receiving the assets in the trust. For example, a special needs trust can be used to pass assets onto an heir without making them ineligible for low-income housing.
A charitable trust is set up like any other trust, except the beneficiary is a charitable organization (or list of organizations). Charitable trusts can be used to split assets between charity and typical beneficiaries, or to earn income on your assets which then can be distributed to your specified organizations.
Also known as a generation-skipping trust, a dynasty trust allows you to leave assets to your grandchildren without incurring taxes. Dynasty trusts are often used in addition to other types of trusts to ensure maximum tax efficiency.
If you’re worried that your beneficiaries will be less than frugal with their inheritance, you can establish a spendthrift trust in order to limit the amount of assets that can be sold. Think of it like giving your heirs an allowance with the funds you leave behind.
When Should You Use a Trust?
Not everyone will need to use a trust to pass on their final wishes, but trusts are important estate planning tools nonetheless. If you have very specific wishes that need to be carried out when you’re gone, a trust can ensure your demands are met. Plus, trusts increase the efficiency of the process by keeping your affairs out of probate court and minimizing the costs and taxes involved. If you’re considering a trust for your estate plan, always consult your financial advisor to ensure you select the right one.
Work With an Experienced Financial Advisor
If you have any questions about which types of trusts for estate planning may be right for your specific financial situation, don’t hesitate to reach out to a team member from Good Life Financial Advisors of Mount Pleasant today.