Are trusts part of your estate plan? The right type of trust can be a strategic move for transferring your assets to people you love, while also reducing tax liability.
- There are revocable and irrevocable trusts. Revocable trusts can be altered during one’s lifetime, whereas an irrevocable trust is permanent once set up.
- There are dozens of different types of trusts, like marital trusts, charitable trusts, and trusts for specific situations and individuals. A financial advisor can help you choose the right types of trust(s) for your specific goals.
Revocable vs. Irrevocable Trusts
A trust can either be revocable or irrevocable. What’s the difference?
Revocable trusts (also called “revocable living trusts”) can be altered or dissolved during your lifetime. Nothing is permanent while you’re living. You maintain ownership of the assets within the trust, meaning that the property remains part of your estate — and subject to taxes.
The biggest benefit to a revocable trust is the ability to more easily transfer assets to beneficiaries upon your death without the need for probate. Upon your death, the trust becomes irrevocable and transfers to your designated beneficiaries.
Irrevocable trusts, on the other hand, are permanent. Once established, you cannot alter the trust. Assets come under the ownership of the irrevocable trust, removing them from your estate. Because of this, irrevocable trusts can help reduce estate and gift taxes for beneficiaries.
8 Common Types of Trusts
There are almost as many trust types as there are situations in which you’d need one. We’ll cover 8 common types of trusts that can be incorporated into your estate plan.
Marital Trusts
Marital trusts can be beneficial for many couples, including avoiding probate and hefty estate taxes. Also known as “A” Trust, this type of marital trust allows a spouse to transfer assets into a trust upon death. Income from these assets then goes to the surviving spouse. After the death of the second spouse, the trust then goes to the designated beneficiaries, like children.
When the designated beneficiaries receive the A trust, they will be subject to estate taxes. So a credit shelter trust (or “B” trust) can be used alongside the A trust. Like an A Trust, it is created upon the death of the first spouse. But this trust is capped at whatever the current estate tax exemption allows as a means of reducing the beneficiaries’ estate tax liability.
Charitable trusts
The most common type of charitable trust is a charitable remainder trust. A charitable remainder trust allows you to create a legacy of philanthropy by allocating your wealth to charities you care about. While giving to causes you care about, you also get a tax deduction on trust contributions and annual annuity payments to either yourself or your chosen beneficiary (or beneficiaries). Upon termination of the trust, the charity receives all remaining assets.
Alternatively, a charitable lead trust works in the opposite direction: your charity (or charities) of choice receive donations for a set period, then your beneficiaries receive any remaining assets.
Situational trusts
Did you know you can put your life insurance into a trust? An irrevocable life insurance trust does just that. This removes the insurance policy from your estate, thus reducing taxes for your heirs.
Your primary or secondary home can also be placed into a trust. A qualified personal residence trust (QPRT) allow you to transfer certain property into the trust, while still living in the residence for a specified time period. This allows you to pass on your property to your beneficiaries while avoiding the probate process. It also lowers the gift tax.
Does a loved one have special needs, like a disability? A special needs trust allows you to pass on assets to a loved one without raising that person’s net worth — and potentially causing them access to government benefits. With this type of trust, you can stipulate how the recipient can use the funds.
Or maybe you want to pass on an inheritance to your child, but with a level of control over how funds are distributed. With a spendthrift trust, upon your death, the beneficiary does not receive ownership of the assets within the trust. Instead, the trustee distributes funds based on the terms you outlined.
With appreciating assets — like real estate and stocks — you may want to consider a grantor-retained annuity trust. This allows you to transfer asset ownership into the trust, while still receiving fixed annuity payments. At the end of the set term, the assets are then transferred to your beneficiaries, free of gift and estate taxes.
Choose the right type of trust for your goals
These aren’t the only types of trusts available. Work with a Landmark financial advisor to choose the right trust(s) for your estate plan.
This material was created by Starling Digital for use by Landmark Financial, LLC and does not represent the views and opinions of Avantax Wealth Management or its subsidiaries.