When thinking about financial wellness and how estate planning may provide peace of mind, you may be looking for assurances that your hard-earned assets will be cared for in a thoughtful manner. Many are concerned with not only passing on assets to their family members but also passing on these assets with limited estate tax liability for their beneficiaries. Many believe the common strategies for this generally include creating wills or naming beneficiaries of retirement assets, but the reality is that, while wills and naming beneficiaries are vital to estate planning, a trust is the proper tool to pass on assets with limited estate liability. That means it is very important to consider what a trust is, when it would make sense to create one, and how to create one.

What Is A Trust?

A trust is a legal arrangement intended to ensure a person’s assets eventually go to specific beneficiaries. The trust creator puts assets in the trust and authorizes a trustee to administer those assets for the benefit of the trust creator and/or beneficiaries. Some trusts can reduce estate taxes.

A trust is generally created in the same way as a will, that is, by a written document. Unlike a will, which is used to give property away after your death, a trust can manage and invest your money and property both during your lifetime and after your death. Also, property that you place in a trust does not have to go through probate, which, in some circumstances, can be time-consuming, expensive, and public.

The person who creates the trust is called the “grantor” or the “settlor.” The person managing the money and property is called the “trustee,” and the trustee can be you or someone else. The person who receives the money or property from the trust is called the “beneficiary.” The money and property in the trust are called the “trust assets.” The trustee must follow the instructions in the trust document describing how to manage and give out the trust assets and how long the trust lasts.

A trust is generally employed to hold assets so that they are safe from creditors or others that might have a claim on them after the grantor's death. In addition, trusts are often used to keep assets safe from family members who might otherwise sell or spend them. Assets may be placed in trust for trustworthy family members—even a relative with the best intentions could face a lawsuit, divorce, or other misfortune, putting those assets at risk. Trusts can also be used to secure assets for specific purposes, such as a beneficiary's education or to help them start a business.

What Can You Put Into A Trust?

You can put anything you own into a trust, like money, bank accounts, stocks, bonds, real estate, life insurance policies, vehicles, furniture, artwork, jewelry, and writings. If you are going to own something in the future, you can put your interest in that property into the trust. Your retirement accounts can name your trust as the beneficiary. The typical way a trust works is that a sum of money, called the "principal,” is put in a bank account or an investment account in the name of the trust. The trustee controls the account. The interest that is earned on the account is called “income.” The trust document will either state how much and when trust principal and income are given to the beneficiary, or it will say that the trustee can distribute what he thinks is proper. It also states who will receive any money that is left when the trust ends. For those who are interested in creating their own family bank utilizing the Infinite Banking Concept, having a trust is very beneficial.

Types of Trusts

Revocable Trust

Revocable trusts, also referred to as "living trusts," are created during the grantor’s lifetime and are generally used for:

• Planning for incapacitation. If you’re diagnosed with a debilitating condition, you can get things in order before you’re unable to do so. When that day comes, the successor trustee takes over managing the trust assets for you.
• Avoiding probate. Assets in a revocable trust can bypass probate — the time-consuming process of settling an estate. Assets that pass through probate become public record, so bypassing probate can be beneficial if you’d prefer to keep the details of the trust private.

In a revocable trust, you (the grantor) can change the beneficiaries and assets as long as you’re alive and physically and mentally able to do so. You can even name yourself as the trustee and name a co-trustee or successor trustee. However, revocable trusts do not include any tax benefits or protection from creditors. For that, you may want to consider an irrevocable trust.

Irrevocable Trust

Irrevocable trusts are often used to minimize estate taxes for beneficiaries. In an irrevocable trust, you can’t change your mind. Once you put assets in the trust and name a beneficiary, it’s permanent. An advantage of irrevocable trusts is that you might be able to reduce your estate taxes because the assets in an irrevocable trust technically aren’t yours anymore. The trust owns them.

These trusts are typically used:

• To receive and hold assets after the grantor dies.
• To hold lifetime gifts for the grantor’s heirs or beneficiaries.

How to Create A Trust

1. Consult with an estate planning attorney. Talk to a lawyer with experience creating trusts—typically an estate planning attorney—about your personal situation. Explain what's most important to you and what your concerns are. He or she can help you understand the benefits of a trust and choose a type that will work for your particular needs. Fees can vary widely, but professional guidance is often worth it. An estate planning attorney can draft your trust documents according to your requirements.
2. Do It Yourself. Some websites offer “do-it-yourself” trusts. They may be a low-cost option, but you may pay in time and effort.
3. Do it through work. Some companies offer discounted estate planning services as part of their employee benefits packages.

The Bottom Line

A trust is a useful tool for tax planning and asset protection, but it can be complex and confusing with the various types and the tax and asset protection consequences for both you and your beneficiaries now and in the future. Getting a basic understanding of what a trust is and how the various trusts operate can help guide you through the thickets of tax and asset protection planning.

Here at Family For Life Insurance, we provide a trust with some of our life insurance policies. If you're interested, Click HERE to book your free consultation on setting up your own personal life insurance policy with a trust.