A Brief Overview of Popular Trusts and Their Benefits

At some point or another during your estate planning journey you may hear mention of establishing a trust. It’s important to understand that creating a trust doesn’t just refer to one option, it refers to many different choices and benefits based on the need and setup of the trust.

Because this is such a complicated undertaking, it’s best to consult an estate attorney when you want to create anything more than a testamentary trust.

However, to get you started thinking about trusts and why you may want to spend time creating one, we’re going to examine some of the most common trusts and the benefits of each.

First of all, what exactly is a trust?

A trust is a legal arrangement that allows a trustee to hold assets on the behalf of beneficiaries, and it allows the grantor to decide how and when assets held in the trust will pass to each named beneficiary. Most notably, it gives you more control over distribution specifics than a will alone.

Why do people use a trust?

There’s a lot of different reasons to establish a trust as part of your estate plan, but what it often boils down to; besides the unique situation you’re planning for, is retaining control.

Many trusts can avoid probate and allow you to pass your assets to beneficiaries faster than transfer by will and with lower court costs. Some trusts are even setup so that the assets they hold are not viewed as part of your taxable estate.

Living vs Testamentary Trusts

The simplest way to remember the difference between a living trust and a testamentary trust is to focus on the word “living”. After all, a living trust refers to any trust you create and fund while you’re alive. Whereas, a testamentary trust is one that is created upon your death, often times as a function of your will.

Revocable vs Irrevocable Trusts

Just as the names imply, a revocable trust allows you to change your mind or update terms and beneficiaries. Living trusts can be either revocable or irrevocable depending on how you establish them.

An irrevocable trust; however, is exactly that – essentially set in stone. You cannot change the terms of an irrevocable trust once it’s been properly established, like in the case of a testamentary trust.

What types of trusts are there?

The defining features and benefits of each trust vary and depend on the primary reason you’re creating it.

Generation Skipping Trust (GST)

Exactly as the name implies, this trust allows you to pass your assets to your grandchildren rather than you your children first and then your grandchildren.

Why is this valuable?

When your children inherit from you, they face a substantial estate tax on the value of the assets. Then, when they die and want to pass their assets on to your grandchildren, those assets – including what remains from your estate – are taxed at the same high estate tax rate again. Meaning, your grandkids are essentially penalized by a double tax burden on the inheritance.

A GST also allows you to protect the assets you want to leave for your grandchildren by keeping them safe from your children’s negative financial events, like divorce or lawsuit.

Essentially, the money does not belong to your children, so a spouse cannot try to lay claim to part of the inheritance, and none of it can be taken by parties interested in assessing damages or collecting on any debt your children may have.

Bypass or Family Trust

A bypass trust; sometimes referred to as a family trust or credit shelter, helps your family lower the impact of estate taxes by funding the trust with up to the personal estate exemption amount is at the time you pass.

Why is this valuable?

You can use a bypass trust to avoid estate taxes on a portion of your estate when you die and while your spouse is still alive they can collect income from the trust and so can the other beneficiaries.

Additionally, when your spouse dies, your bypass trust is usually not included as part of their taxable estate. So, while your spouse and loved ones can benefit from the trust while the surviving spouse is still alive, your spouse doesn’t technically inherit those assets so they are not considered part of their estate and won’t be taxed as such when they die.

Qualified Personal Residence Trust (QPRT)

A QRPT allows you to pass your primary or secondary home on to your children at a discounted value, so your estate and gift taxes on the value of your home are lessened.

The QPRT is unique in that it’s a trust that not only passes your estate on to beneficiaries and limits the tax consequences, but it also has a provision in it that allows you to reserve the right to live in the house for however long a period you assign.

However, it is a bit of a gamble; if you die before the term you choose expires, then the property remains part of your estate and the value of this trust is lost.

Why is this valuable?

In many cases the value of the primary residence of a grantor represents a large portion of their estate. Being able to minimize the taxes on a significant portion of your overall estate can be a huge benefit.

Qualified Terminable Interest Property (QTIP)

Primarily used to provide an income stream to your surviving spouse, this trust allows you to leave assets to ensure your spouse is cared for, but also know that any remaining balance will pass to your other named beneficiaries.

Why is this valuable?

Instead of leaving assets directly to your spouse, and having the assets become part of their estate – you can take care of the surviving spouse but also limit their control of the trust assets so anything that remains in the trust at their death passes to your beneficiaries, not theirs.

Why should you consult a professional about establishing a trust?

Believe it or not, there’s many other trusts in existence that serve all kinds of different purposes. Which is why it’s so important to consult a professional when assessing your need for a trust and what types of trusts will best meet your objectives.

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