Going Back to the Basics—What is a Trust?
When we’re children, we look up to adults as a repository of knowledge. We listen to them because we think they know what they are doing. And we believe that one day something will click, and we will be as self-assured as all those adults around us. Unfortunately for us, we never really learn anything.
All through our school years, we study about everything about the Pythagoras Theorem and the structure of a biological cell. What we never end up learning, however, is the important information we actually need to get through this confusing life. Is there anyone who knows how to do taxes? Not in my state.
Another one of these puzzling conundrums is estate planning. For instance, many people upon hearing the word ‘trust’ think of all the wealthy people in LA zip codes meeting with their lawyers. If you have a similar misconception, it’s about to be cleared up: a trust is not only for millionaires, and it’s not just a will. What’s more, you could be drafting as part of your estate plan! Here are some basics about trusts.
Defining a Trust
An estate plan has two main parts, but for this discussion we are only concerned with the first one: the division of your estate after you pass away. This part of the estate plan divides your assets clearly between one or several parties in case of your demise. But the thing is you don’t know anything about what circumstances that would be in. A trust is an agreement that helps you manage this further, especially by letting you avoid probate.
This agreement is made between the grantor and the trustee to manage property for another third party called the beneficiary. In this scenario, a grantor would entrust trustee to take care of everything for the benefit of this third person. These parties can be the same person or all different people—it all depends on the particulars.
What Does It Mean for You?
So what does this contract mean for you and your family? Can it help you in some way? Think of a trust like a bank account that you can add funds to. As we mentioned before, a trust is especially advantageous if you want to avoid probate. It’s like a private box: transfer your assets to the box by funding your trust, and at the time of death, probate is not applicable for anything that’s within it.
Just setting it up is not enough. You also have to keep adding to this fund so that whoever you appointed as trustee can manage it properly.
Types of TrustsWhat kind of trust you want to set up depends purely on your needs. It could be either a revocable trust (one that you can change or revise whenever you want) or an irrevocable one (that stays intact and unchangeable after it has been set up). Here are some from the second category.
ILIT- Irrevocable Life Insurance
In this kind of trust, the owner and the beneficiary own one or several life insurance policies. It’s an irrevocable trust that helps insurance policy proceeds to be excluded from the current gross estate of a person. In short, if it meets IRS guidelines, ILIT can get you far away from tax levied on estate.
QPRT- Qualified Personal Residence Trust
Another similar trust is QRPT, which helps the owner remove assets from their estate in order to avoid excess estate tax. For instance, if the deed to your house is placed in this fund, you can continue living in it for a set amount of time. After that designated period is over, the fund is transferred to another beneficiary’s name—and you don’t have to pay the gross estate tax on it.
This kind of trust can really improve the quality of life for some people. The Special Needs Trust is irrevocable and lets the beneficiary use to their assets and saved income. At the same time, the person can still meet the baseline for government benefits for special needs.
CRT- Charitable Remainder
This kind of trust allows a person to take full advantage and income off of their trust for a maximum period of twenty years. It is an irrevocable trust, and it comes with the additional clause of charity. When you pass away, or the time period expires, the assets from the trust go to a charity of your choice. You can gain partial tax deduction with a CRT.
Finding out What’s Best for You
Besides these irrevocable trusts, there is also what we call the living trust that you can change any time you want. This is the type of trust most people go for since it allows them the privilege of changing their mind. Setting up a trust has myriad benefits, so make sure you’re doing the best you can to secure your future.
Although we tried to explain it as exhaustively as we could, none of these trusts are that straightforward. You would need a property law attorney for some quality estate planning in Queens.