Although we all hope to enjoy many more years with our loved ones, creating an estate plan is essential for every adult, no matter their age. Having a plan in place means your wishes will be followed, both in terms of asset distribution and the financial well-being of those you care about. One key aspect of estate planning is using trusts, which offer a variety of advantages for individuals and families. In this guide, we’ll cover the fundamentals of using trusts in estate planning, explain the different types, and explore how trusts may play a vital role in your estate planning process.
Trusts 101: A Foundational Understanding
Though a trust can be a complex financial tool, when you distill it down to the basics, it is a legal arrangement that allows you to set aside assets for the benefit of specific individuals or purposes. At its core, a trust involves three key parties:
- Grantor: The person who establishes the trust and contributes assets to it.
- Beneficiary: The individual(s) or entity (such as a charity) who will benefit from the trust’s assets.
- Trustee: The person or institution responsible for managing the trust and ensuring the assets are distributed according to the trust’s terms.
Types of Trusts
Trusts come in various forms, each designed to serve specific purposes. Here are a few common types you might consider as you think about trusts and estate planning:
Revocable Living Trust
A revocable living trust is established during the grantor’s lifetime and can be modified or revoked as needed. It allows assets to avoid probate, potentially saving time and costs for beneficiaries – both of which are significant advantages when your loved ones are already facing a difficult time of grief.
Irrevocable Trust
An irrevocable trust, once established, generally cannot be altered without the consent of the beneficiaries. This type of trust can offer potential estate tax benefits and protection from creditors.
Testamentary Trust
Created through a will, a testamentary trust comes into effect after the grantor’s death. It can be used to provide for minor children or individuals with special needs.
Special Needs Trust
If one or more of your loved ones have special needs, you might also consider a special needs trust (SNT). This is a trust designed to provide for the long-term care of individuals with disabilities without jeopardizing their eligibility for government benefits.
Charitable Remainder Trust
This type of trust allows the grantor to donate assets to a charitable organization while retaining an income stream for a specified period. Upon the trust’s termination, the remaining assets go to the chosen charity – a meaningful distribution of your assets upon your passing.
Using Trusts in Estate Planning: Potential Advantages
Incorporating a trust into your estate plan can be a beneficial strategy in certain situations. Here are some key advantages of using trusts in estate planning as you plan for the future:
Probate Avoidance
As mentioned above, assets placed in a trust can bypass the probate process, which can be time-consuming and costly – not to mention stressful for your heirs. Combining trusts and estate planning allows your beneficiaries to receive their inheritances more quickly and efficiently.
Privacy
Unlike wills, which are subject to public record, trusts provide a level of privacy as their terms and distributions are generally private. In this way, you can keep family matters away from prying eyes.
Control and Flexibility
As you think about the topics of trusts and estate planning, consider that trusts allow grantors to specify how and when assets are distributed to beneficiaries. This can be particularly useful for individuals who want to provide for minor children or make certain funds are managed responsibly.
Tax Efficiency
Certain trusts, such as irrevocable life insurance trusts (ILITs), can help minimize estate taxes by removing the insurance policy from the grantor’s taxable estate.
Caring for Loved Ones
Specialized trusts, like special needs trusts mentioned above, make sure that loved ones with specific needs are provided for without jeopardizing their eligibility for government assistance.
Using Trusts in Estate Planning: Do You Need Professional Guidance?
While trusts offer many advantages, it’s beneficial to seek guidance from an experienced estate planning attorney or financial advisor to help you determine the most suitable strategy for your individual circumstances. These experienced professionals can guide you in crafting a trust and estate plan that reflects your objectives for using trusts in estate planning so you can provide financial support for your loved ones in the future.
Sources:
- [1] https://www.investopedia.com/terms/p/probate.asp
- [2] https://www.investopedia.com/articles/personal-finance/092315/7-reasons-own-life-insurance-irrevocable-trust.asp
Amy Anderson joined the ILG Financial team in 2023 as the client relations coordinator. Her responsibilities include scheduling of appointments, annual check-up notifications, and annuity and required minimum distribution assistance. She is a graduate of Harding University with a degree in Computer Information Systems. Amy and her husband have two children and she enjoys reading, crocheting, music and spending time with her family.
Chase Lopez joined the ILG Financial team in 2020 as an advisor. Chase is a 2016 James Madison University graduate with a degree in management. Chase has been trained under the tutelage of Dave Lopez, who is not only the founder and managing member of ILG Financial, but also is Chase’s uncle and godfather. He also enjoys working alongside his cousin, Megan, who is Dave’s daughter. Chase, as a fiduciary, believes in putting his clients interests first, and building out plans for his clients where they can have a happy and fruitful retirement. He married his beautiful wife in February 2022 and both use most of their free time chasing around their little pup, Aurora.
Jessica Carson joined the ILG Financial team in 2018 as an agent. Jessica and her husband have four children, two dogs, 3 barn cats, 5 chickens, and three parakeets. She indeed loves her children and pets! When not at work, Jessica enjoys playing the piano and cello as well as traveling and spending time outside with her family, hiking, fishing, and boating.
Terri Center joined the ILG Financial team in 2019 as client services manager. She handles client records, application processing, and gathering information to provide a professional and friendly experience with all of our clients. Terri is a graduate of Oakland University. She is married and has two children. She enjoys hiking, family time, and puzzle challenging video games. She also likes to share her creativity in her canvas paintings and sewing projects.
Megan Jones joined the ILG Financial team in 2020 as marketing director. Megan and her husband live in Fredericksburg, VA with their German Short Haired Pointer, Gus. Megan is a graduate of Longwood University and holds a degree in communications. Megan is the oldest of Dave Lopez’s three children and not only enjoys working alongside her father, but also with her cousin, Chase, who joined the ILG Financial team in 2020 as an advisor. When not at work, Megan enjoys sitting on the back porch with family and friends enjoying food and music.