Trust that Your Financial Legacy Carries On with the Right Type of Trust

Trust that Your Financial Legacy Carries On with the Right Type of Trust

Different types of trusts are available to help ensure your long-term financial legacy is honored and more of your assets go to the people or causes you care about, rather than taxes.

At the simplest level, a trust is a legal arrangement that gives you, another person, or an institution the ability to manage your money or other assets (like stocks, bonds, real estate, art, jewelry, heirlooms, furniture, and life insurance) for your benefit or the benefit of others, during your lifetime and/or upon your death.

There are two basic types of trusts. Revocable trusts can be changed or amended after they are created; irrevocable trusts cannot (with few exceptions, based on state law). These trusts operate similarly to a will, with one key difference: upon your death, assets in a trust are not subject to probate.

Probate is a legally required process that follows one’s death to confirm a will is valid and that the executor carries it out based on the decedent’s wishes. Probate can take several weeks to several months or even longer in cases where the will is disputed. During the probate process, all of the decedent’s assets and wishes are made public. Having a trust helps you – and your beneficiaries – avoid the probate process altogether.

With a revocable trust, you name a trustee to manage its assets. You are still viewed as the owner of the assets and can make changes at any time. You remain responsible for any applicable taxes. You decide what happens to your trust upon your death. One option is to close the trust and have all assets distributed to beneficiaries. Another option is to have your trust automatically create irrevocable trusts for the people or institutions you name (this type of trust is called a testamentary trust).

When it comes to an irrevocable trust, your assets are moved into a trust managed by a trustee you name. You cannot make any changes or amendments once the trust is created. The trustee takes over all responsibility for the assets, including paying any required taxes; you give up your assets and all control over them. While the trustee can distribute income to you if authorized by the trust agreement, he/she will not distribute principal to you – you are putting 100% trust in that person.

This can sound scary, but it also gives you a way to protect assets while addressing other needs. For example, you may have to spend most of your assets before Medicaid will cover any of your long-term healthcare needs (whether at home or in a nursing home). However, if you open a Medicaid Asset Protection Trust – a type of irrevocable trust – at least five years before requiring care, you may be eligible to receive long-term care benefits via Medicaid and protect your assets at the same time.

Another good example of how a trust can protect assets while addressing other needs relates to a special needs child. If a special needs child is gifted money, they may be disqualified from receiving public assistance. However, a special needs trust allows you to gift money to a special needs child without impacting their eligibility for public programs like Social Security and Medicaid.

There are trusts that protect assets from claims of future lawsuits or creditors; trusts to benefit qualified charities; trusts to protect against reaching the lifetime gift tax exemption; trusts that transfer wealth across generations without tax implications; trusts for beneficiaries who aren’t great managing money or who have multiple creditors; trusts to protect a spouse or family members from high estate taxes; family trusts; funeral trusts; land and life insurance trusts; residence and property trusts; pet trusts; and more, depending on the state where you live.

There is no minimum amount of assets required to open a trust. You do have to cover related legal fees, which can run upwards of $1,000 (or significantly more depending on your total assets and wishes). In general, if you have more than $100,000 in assets and real estate (i.e., a home), you may want to evaluate how the cost of setting up a trust compares to potential tax and other savings. We can help.

We are RBT CPAs Gift, Estate, and Tax practice professionals. We help clients define their financial goals, understand and weigh their options, and develop an estate plan. We are not lawyers; we are accountants and financial planning experts. We can work with your attorney or refer you to one, and we can review legal documents to make sure they accurately reflect your wishes. We can meet with you annually to review your estate plan, ensuring it’s on track to reflect your wishes and is adapted to address any tax law changes that occurred during the year.

If you want to learn more about how we can be Remarkably Better Together, please don’t hesitate to give us a call or send us a message.


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