Trusts are important financial instruments in estate planning. Unlike a will, with a trust, you can legally arrange your estate in a way that saves your family a substantial amount of money on taxes, avoids probate and those expenses, and distributes your assets according to your wishes after you’re gone.
What is a Trust?
The most common type of trust is a legal arrangement that someone sets up to designate what will happen to their assets upon their death. Typically, such trusts name a “trustee,” a person who’ll be responsible for carrying out the trust’s instructions.
The person setting up the trust, known as the “trustor” or “grantor,” also names beneficiaries of the trust funds. Beneficiaries are the people who’ll receive the assets when the trustor dies.
A trustee is legally appointed by the trustor to be responsible for managing the funds for the beneficiaries of the trust. You probably know that beneficiaries are people named to receive funds upon someone’s death. Interestingly, the trustee selected by the trustor is most often also one of the beneficiaries, or heirs, to the trust funds.
Although there are different kinds of trusts, trusts are typically considered a part of estate planning. Estate planning has to do with management of someone’s money after they die. Placing money in a trust provides certain protections for your heirs under state law. Since state laws vary, how trusts secure your funds will also vary, based on your home state.
Why Get a Trust?
One good reason to set up a trust is to avoid probate. Probate is a legal process that takes over assets (in most states) when you die. All your finances then become a part of public record.
As a result of probate, your assets will deplete due to having to pay court and legal costs, taxes and creditors that have information about, and therefore access to the funds. Once probate ends, the remaining assets are given to your designated beneficiaries.
So, depending on the trust type, you’ll avoid probate, paying estate taxes on assets and having financial matters exposed during the court process.
What are Different Types of Trusts?
There are several types of trusts, such as Revocable Living Trusts, special needs trusts, Life Insurance Trusts, and charitable trusts. The type most often referred to is the…