What is a Trust?

Feb 12, 2024

What Is A Trust?

A trust is conventionally employed to reduce estate taxes and can provide additional advantages when incorporated into a carefully designed estate plan.

A trust serves as a fiduciary arrangement empowering a third party, the trustee, to hold assets on behalf of designated beneficiaries. The structuring of trusts varies, enabling precise specifications on asset transfer conditions.

Due to the common avoidance of probate, assets in a trust can potentially be accessed by beneficiaries more expeditiously compared to those governed by a will. In the case of an irrevocable trust, it may not contribute to the taxable estate, potentially reducing tax liabilities upon the grantor’s demise.

Trusts offer additional advantages, including:

  1. Wealth Control: Trusts allow for precise stipulations, determining when and to whom distributions occur. This flexibility extends to revocable trusts, enabling access to trust assets during the grantor’s lifetime while designating beneficiaries for the remaining assets, addressing complexities like children from multiple marriages.
  2. Legacy Protection: A well-crafted trust can shield the estate from creditors seeking claims against heirs or beneficiaries with less financial acumen.
  3. Privacy and Probate Efficiency: Trusts provide confidentiality by bypassing probate, a public record. This not only maintains privacy but may also result in savings on court fees and taxes, enhancing the overall efficiency of the asset transfer process.

 

Types of Trusts

Marital or “A” trust Designed to provide benefits to a surviving spouse; generally included in the taxable estate of the surviving spouse
Bypass or “B” trust Also known as a credit shelter trust, established to bypass the surviving spouse’s estate to make full use of any federal estate tax exemption for each spouse
Testamentary trust Outlined in a will and created through the will after the death, with funds subject to probate and transfer taxes; often continues to be subject to probate court supervision thereafter
Irrevocable life insurance trust (ILIT) An irrevocable trust designed to exclude life insurance proceeds from the deceased’s taxable estate while providing liquidity to the estate and/or the trusts’ beneficiaries
Charitable lead trust Allows certain benefits to go to a charity and the remainder to your beneficiaries
Charitable remainder trust Allows you to receive an income stream for a defined period and stipulates that any remainder go to a charity
Generation-skipping trust Using the generation-skipping tax exemption permits trust assets to be distributed to grandchildren or later generations without incurring either a generation-skipping tax or estate taxes on the subsequent death of your children
Qualified Terminable Interest Property (QTIP) trust Used to provide income for a surviving spouse. Upon the spouse’s death, the assets then go to additional beneficiaries named by the deceased. Often used in second marriage situations, as well as to maximize estate and generation-skipping tax or estate tax planning flexibility
Grantor Retained Annuity Trust (GRAT) Irrevocable trust funded by gifts by its grantor; designed to shift future appreciation on quickly appreciating assets to the next generation during the grantor’s lifetime

 

What does Revocable vs. irrevocable mean?

Revocable Trust:

Commonly known as a living trust, a revocable trust facilitates the seamless transfer of assets outside of probate while allowing the grantor to maintain control during their lifetime. This flexible trust can be dissolved at the grantor’s discretion, offering adaptability to changing circumstances. While the grantor can serve as the trustee, retaining ownership and control, provisions for a successor trustee can manage the trust in case of incapacity or death. Despite its probate-avoidance benefits, a revocable trust is typically subject to estate taxes and treated as a standard asset during the grantor’s lifetime.

Irrevocable Trust:

In contrast, an irrevocable trust transfers assets out of the grantor’s estate, potentially shielding them from estate taxes and probate. Once executed, the trust cannot be altered by the grantor, leading to a loss of control over the assets and an inability to modify terms or dissolve the trust. Opting for an irrevocable trust is advisable when the primary goal is to minimize estate taxes by effectively removing assets from the estate. Additionally, the transfer of assets to the trust relieves the grantor of tax liability on generated income, with potential protection against legal judgments.

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Investment advisory services and insurance services are provided through The Retirement Solution LLC., a Registered Investment Advisor.
The general views outlined in this material are those of The Retirement Solution LLC. and should not be construed as individualized or personalized investment advice. This is for general information only and is not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial planner before investing.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested directly. Any economic and/or performance information cited is historical and not indicative of future results. There is no guarantee that the strategies discussed will be successful. Risk accounts are not FDIC insured, not bank guaranteed, may lose value, not insured by any Federal Government Agency, and not a bank deposit.

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The Retirement Solution LLC. is a registered investment adviser. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser, tax professional, or attorney before implementing any strategy or recommendation discussed herein.

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