What is estate planning?
Estate planning is a process that helps you to plan for how your assets will be managed when you are incapacitated and how they will be distributed after you die. Creating a trust for estate planning purposes can help you to retain control over the distribution of your assets.
Estate plans can also help you to minimize the impact of taxes and other costs on your estate. While some people put off estate planning until they are older, it is a good idea for adults of all ages to have an estate planning trust in place in case they suffer incapacitating injuries or illnesses.
What is an estate planning trust?
A trust for estate planning is an estate planning tool that creates a fiduciary relationship through a written agreement between consenting parties. In this trust, a trustor gives a trustee the right to hold the legal title to assets or property for the benefit of one or more beneficiaries.
This type of trust helps to ensure that the assets will be distributed according to the trustor’s wishes. It also minimizes or negates inheritance or estate taxes. One example is a qualified terminal interest property trust or QTIP trust, which is a marital trust that helps to provide for a spouse while protecting the assets held in the trust for future generations. There are several ways to create a trust, including on your own, with a financial advisor, or with an estate planning attorney.
Estates and trusts
Estate planning safeguards the way in which your assets will be transferred after you die and who might have the authority to manage them while you are alive but are incapacitated and unable to make decisions for yourself. An estate plan may include a number of different documents, including an estate planning trust, a will, a living will, a durable financial power of attorney, an advance directive, and a durable medical power of attorney.
In the most recent year for which data is available, the IRS reports that 3.17 million tax returns for estates were filed. The reported income on these returns totaled $141.6 billion.
Types of trusts
There are two main types of trusts, which include revocable trusts and irrevocable trusts. A revocable trust is a legal document that contains terms that can be modified, removed, or amended by the grantor. During the life of the trust, the income that is earned by the trust is distributed to the grantor. The property that is held in this type of trust for estate planning will not be transferred to the beneficiaries until after the grantor dies.
A revocable trust avoids probate if you include all of your assets. However, the assets can still be reached by your creditors during your lifetime. A revocable trust does not provide you with any tax advantages.
An irrevocable trust is an estate planning trust that contains terms that cannot be modified, deleted, or added to without getting the permission of the grantor’s named beneficiaries. The trust property is owned by the trust for the benefit of the named beneficiaries. The grantor legally removes all ownership to the assets and transfers them to the trust.
People create irrevocable estate planning trusts for estate, legal, and tax reasons. These types of trusts are safe from legal judgments and are out of the reach of creditors. The tax liability of the income that the assets generate is also removed. Irrevocable estate planning trusts can be living trusts or testamentary trusts.
Living trusts are trusts that are established and funded by a person during his or her lifetime. Testamentary trusts are irrevocable and are created after the creator dies. They are established by the terms of the creators’ wills. Testamentary trusts can be changed or canceled only if the creators make changes to their wills before they die.
There are many different types of estate planning trusts that fall into the two broader categories of trusts. A trust for estate planning might include any of the following types:
- Marital trusts
- Bypass trusts
- QTIP trusts
- Family trusts
- Generation skipping trusts
- Special needs trusts
- Spendthrift trusts
- Totten trusts
- Irrevocable life insurance trusts or ILITs
- GRAT or grantor retained annuity trusts
- Charitable trusts
Marital trusts are established to care for the estate and the home for the benefit of the surviving spouse. The trust benefits include avoiding probate and providing for the spouse while avoiding potential estate taxes. The surviving spouse’s heirs will pay any estate tax on the remaining assets that are eventually passed to them.
Bypass trusts are trusts that are created by married couples to minimize the estate taxes that their heirs might have to pay. Also called a credit shelter trust, a bypass trust is irrevocable. The assets that are held by the credit shelter trust are transferred from one spouse to the other upon death. The surviving spouse does not directly hold the assets, however. The trustee manages the assets, which allows them to be excluded from the spouse’s estate. When the surviving spouse dies, the remaining assets go to the beneficiaries without being assessed any estate tax.
A qualified terminable interest property trust or QTIP trust is usually used in second marriages and can help to minimize taxes. A QTIP trust is created for the purpose of providing income for a surviving spouse. Upon the surviving spouse’s death, the assets go to additional beneficiaries previously named by the grantor.
A family trust is created by an individual for the benefit of his or her family. Family trusts can help to ensure that the assets will be passed to the family members in the manner in which the grantor intends while minimizing or avoiding estate taxes.
A generation skipping trust is normally created for the benefit of the grantor’s grandchildren. It allows the transfer of funds from one generation to the next, but they do not have to be the grandchildren. Instead, the age difference the beneficiary must be more than 37 and 1/2 years younger than the trustor.
A special needs trust is a type of trust that provides for family members or children who have special needs or who need specialized medical or managed care. You can include terms in the special needs trust to prevent other family members from taking over the assets.
A spendthrift trust is a type of trust that can be established if you are concerned about a beneficiary’s ability to manage his or her finances. A spendthrift trust can offer long-term protection for an heir that you worry will be unable to manage his or her inheritance. Instead of all of the funds being directly transferred to the family member who inherits them, the distributions will instead be contingent on the family member’s needs.
A Totten trust is a trust that is created so that you can put money into an account or a security. Upon your death, the money will be transferred to the named beneficiary of your Totten trust. An example of a Totten trust might include your bank account that you have included a transfer-on-death provision or another type of account.
An irrevocable life insurance trust or ILIT is a type of irrevocable trust in which the ILIT is the beneficiary of your life insurance policy. When you die, the policy’s proceeds will go to the trust. The trustee manages the proceeds for the benefit of your beneficiaries. This allows your beneficiaries to avoid estate taxes on your life insurance proceeds when they inherit them.
A grantor retained annuity trust or GRAT is an irrevocable trust for a specific period of time. The person who creates the GRAT pays a tax when it is created. The assets are then placed in the GRAT, and an annuity is paid out every year. When the time period ends, the assets are transferred to the beneficiary as a tax-free inheritance.
Charitable trusts are a way for you to create a legacy from the assets in your estate. There are a couple of types of charitable trusts, including a charitable lead trust and a charitable remainder trust.
A charitable lead trust allows you to designate certain assets for a charity or charities. The remaining assets will pass to your beneficiaries after your death. With a charitable remainder trust, you are able to receive income from your assets for a limited time. Your remaining assets or income will be passed to a designated charity.
Benefits of a trust
It is important for you to understand trust pros and cons. There are several trust for estate planning benefits, including the following:
- Allows your wealth to be distributed in a discrete and efficient manner to the beneficiaries
- You retain control over the distribution of your assets
- Can provide you with protection from creditors and lawsuits
- Can help you to preserve your assets
- Help to minimize or avoid estate taxes
Limitations of a trust
While a trust may offer multiple benefits for estate planning, there are also some limitations. Trusts can be expensive to establish and to maintain. The legal fees can be quite high if your estate is complex. After you have set up a trust during the estate planning process, you may be charged maintenance fees. These are the costs that the trustee charges to manage the trust assets. There might also be some unexpected costs such as having to pay legal fees to defend against claims.
Trust and inheritance laws change over time and can be complex. To make certain that your trust follows the law, you will have to review and revise it from time to time and may have to seek the advice from a professional.
Preparations for opening a trust
In order to create a trust as a part of the estate planning process, you will need to start by figuring out which type of trust is right for you. You will want to think about whether you want to set up a living trust or a testamentary trust. You will also want to decide whether your trust will be revocable or irrevocable.
You will next need to decide who will be the beneficiary or beneficiaries of your trust. Your beneficiary or beneficiaries could include your heir or heirs, but they can also be other people or charities. You will then need to choose who will serve as the trustee and figure out what assets you will place into the trust. Possible assets that you could transfer to the trust include cash, real estate, stock, and other valuable assets. If you will serve as the trustee, it is important for you to choose someone who can serve as your alternate trustee.
Finally, you will need to complete the required paperwork and meet the filing requirements. These vary from state to state. It may be a good idea for you to seek legal advice from an estate planning lawyer to learn about the trust pros and cons so that you can decide whether a trust is right for you.
An estate plan and a trust can help you to pass wealth in the manner in which you choose and can help you to retain control over the distribution to an heir. If you decide to create a trust, you can open the account with M1 Finance.
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Trust accounts and M1 Finance
M1 Finance supports both revocable and irrevocable trust accounts. With M1 Finance, you can pick the investments that match your risk tolerance level, your financial goals, and the length of time that you have to invest. If you would prefer to have some help, you can select a portfolio that has already been created by financial experts to match various goals and risk tolerances.
M1 Finance offers a platform that is intuitive. It helps to keep the investments in your portfolio balanced so that they are aligned with your goals automatically. M1 Finance is a hybrid of a traditional brokerage and a robo-advisor, combining key principles of investing with digital technology to help you to build wealth effortlessly.
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