Trusts — Not Just for Estate Taxes

In the past, trusts were often used to avoid estate taxes, but that purpose has become less important for most people with current high exemption amounts ($12.92 million in 2023, $25.84 million for a married couple). However, some states have estate taxes or inheritance taxes with lower exclusion amounts, and a properly constructed trust can serve many other purposes for families of more modest means.

A trust might help avoid the time-consuming and costly probate process, maintain control of a legacy for your heirs, provide for a dependent with special needs, or make a substantial contribution to your favorite charitable organization.

Legal Control of Assets

A trust is a legal arrangement under which one person or institution controls property given by another person for the benefit of a third party. The person giving the property is referred to as the trustor (or grantor), the person controlling the property is the trustee, and the person for whom the trust operates is the beneficiary. With some trusts, you can name yourself as the trustor, the trustee, and the beneficiary.

Although you may be hesitant to give up control of your assets, in some cases it might be worthwhile to choose an independent trustee who would be subject to strict legal requirements in administering the trust.

Testamentary vs. Living Trusts

A testamentary trust becomes effective upon your death and is usually established by your last will and testament. It enables you to control the distribution of your estate (often used to name a trustee for assets left to minor children), but it does not avoid probate. You can change or revoke a testamentary trust during your lifetime.

A living trust takes effect during your lifetime. When you set up a living trust, you transfer the title of all the assets you wish to place in the trust from you as an individual to the trust. Technically, you no longer own the transferred assets. If you name yourself as trustee, you maintain full control of the assets and can sell or give them away as you see fit. However, this option may negate any estate tax benefits.

Living trusts can be revocable or irrevocable. A revocable trust can be dissolved or amended at any time while the grantor is still alive. An irrevocable trust, on the other hand, is generally difficult to modify or revoke.

Comparing Features

Even if you have a trust, you should have a will to control assets not captured in the trust and/or to appoint a guardian for minor children. You might also need a will to establish a testamentary trust.

Special-Purpose Trusts

Trusts, whether testamentary or living, can be established for a variety of specific purposes. Here are three of the most common.

Charitable trust — Enables you to provide a charitable organization with a regular income for a set period or a lump sum at the end of the period.

Incentive trust — Makes the transfer of assets to heirs contingent on their meeting goals or expectations, such as attaining higher education or starting a family.

Supplemental or special-needs trust — Can help provide for a disabled child and may ensure that the child qualifies for government assistance programs.

While trusts offer numerous advantages, they incur up-front costs and often have ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of experienced estate planning, legal, and tax professionals before implementing trust strategies.

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