What's A Trust And Do You Need One?

Welcome back to our estate planning series. Last time, we covered the basics of estate planning, and today, we dive into trusts. Trusts are excellent vehicles for passing down wealth in a structured, efficient, and tax-friendly way. Let’s examine the basics of trusts (what they are and how they work) and if they could enhance your estate plan.

What Is A Trust?

Surprisingly, for some, trusts are a rather common estate planning tool. You don’t have to be ultra-wealthy to make the most out of this vehicle. Trusts can help bring order, structure, and management to the wealth transfer process. They also bring a sense of clarity and peace of mind, knowing that your wishes are specifically outlined in a legal document. Trusts are legal/fiduciary arrangements that allow a third party to control and manage assets on behalf of a beneficiary. In English, all that means is that a trust sets off a specific administration process for handling and passing on assets.

The Three Parties In Every Trust

All trusts are not created equal. Some are complex, while others are more straightforward. No matter the case, three key players are always involved. Below is a summary of the three parties in every trust:

• Grantor: the person who establishes the trust

• Trustee: The person or entity (corporation, bank, etc.) that controls the trust. The trustee manages the finances, makes financial decisions, and administers the assets to the proper people at the appropriate time.

• Beneficiary or beneficiaries: The people or places (charity, business, foundation, etc.) that receive the funds from the trust. You can have multiple beneficiaries of a trust.

The Two Categories That Trusts Fall Into

While there are numerous types of trusts, they fall into one of two categories.

Revocable Living Trust

In this type of trust, the grantor can change the terms. So you aren’t stuck with the rules you set in the beginning. As life and circumstances change, you can alter the trust’s terms to best reflect it. Due to its flexibility, many people benefit from revocable trusts. The downside is that it doesn’t offer as many tax benefits or creditor protection as an irrevocable trust.

Irrevocable Trust

Once you establish this type of trust, you generally can’t make any changes. The same is true for the assets that go into this trust. As soon as you transfer assets into an irrevocable trust, you can’t get them out. There’s a plus side: those assets no longer belong to you; they belong to the trust, which could save you on estate taxes in the long run. These trusts tend to be more complex.

The Top Benefits Of Using A Trust In Your Estate Plan

Trusts are excellent vehicles that come with several benefits. Below is a summary of the most important benefits to consider.

Trusts Avoid Probate

Probate is a court-sanctioned process that catalogs your assets and ensures they go to the right people. Since a trust already makes that information abundantly clear, there is no need to involve the courts. This could save your loved ones time, hassle, and money. Another benefit of avoiding probate is maintaining privacy. Your estate, all of the details, the contents that make up your family’s net worth, etc., won’t be in the public record.

Trusts Give You More Control

Trusts give you more control over where and how your assets are distributed. You can set parameters/rules around receiving funds. For example, you might have a set percentage that goes to your children when they turn a certain age, reach a certain milestone, etc. This makes the process of creating a trust very intentional. You are forced to think through what you really want to happen to the assets that you’ve worked so hard to build (and grow). If you have specific desires for your children, philanthropic wishes, or anything in between, a trust can help facilitate everything. 

Helps If Incapacitated

Living trusts provide benefits if incapacitated. Your successor trustee can step in and make decisions for you without going to court. This provision eases the stress for family members, loved ones, and friends.

Tax Benefits

Some, but not all, trusts offer tax benefits. It depends on the type of trust you create. For example, some assets in irrevocable trusts are sheltered from estate tax. But since assets in a revocable trust technically belong to you, they still “count” toward the value of your estate. 

The Dala Group and Your Estate Plan

Trusts are varied and, as such, have practical applications in several ways, including:

• Special Needs Trusts (SNTs) when a child needs care for the rest of their life due to handicap or mental health/addiction issues.

• To set parameters around how minor children will receive assets if their parents were to die unexpectedly.

• To avoid estate taxes, especially in Illinois, where the state estate tax limits are $4 million, and the state does not allow a shared marital exemption. This means that you have to try to split assets evenly between the spousal trusts. Don’t worry; we’ll discuss Illinois estate taxes later in this series. 

Remember, trusts can be rather complex, and it’s important that our clients have our help and support as they work with their estate planning attorney to draft the paperwork. We’re happy to join clients in those calls and meetings so they can rest assured that their wishes are properly communicated. While trusts can be a significant part of your estate plan, it’s just one step in a long journey. Say you set up a trust; perfect! Now, you have to make other decisions to make the most of the trust, like retitling specific assets, updating beneficiaries, and more. Forgetting to properly use the trust you spent so much time creating is a big mistake we see. It’s like buying a new house but not moving any of your belongings in. When you establish a trust, make sure to work jointly with your attorney and us to ensure that all of your assets are properly registered. We’d love to be a part of your journey in building your estate plan. Reach out today.