If you think an estate plan is just for the rich and famous, think again. Anyone with assets, including a home, 401(k) plan, or savings account, should think about how those possessions will be distributed among heirs. One key tool of an estate plan is a trust. And it’s important to set up the right trust for your needs.
Revocable living trust
A revocable living trust provides instructions on how you wish your estate to be distributed upon your death. It’s called a living trust because you create it during your lifetime and you can change it while you’re still alive. Revocable living trusts allow heirs to bypass the time and cost of probate, a legal process to distribute an estate that can easily cost families thousands of dollars and take months or longer to resolve.
Irrevocable trust
As the name implies, an irrevocable trust cannot be changed or modified after it is created without obtaining a court order. An irrevocable trust is appropriate if the estate value is higher than the federal tax exemption for inheritance taxes, currently $11 million for an unmarried person and $22 million for a married couple. We should all be so lucky!
Asset protection trust
An asset protection trust is a strong tool against creditors, lawsuits, and judgments. An asset protection trust may also help deter a lawsuit as well as make for favorable outcomes of settlement negotiations. This type of trust is irrevocable for a set period and the trustor is not able to access the assets during that time.
Charitable remainder trust
For individuals with a strong desire to give back, a charitable remainder trust is a good way to leave assets to your favorite charities. Charitable trusts may offer greater flexibility and control over your charitable contributions. They help you fulfill your philanthropic goals, while helping with estate planning and tax management. You may transfer the selected assets into the trust and your trustee pays no capital gains taxes when those assets are sold. Win win!
Special needs trusts
Special needs trusts specifically benefit a person with physical and/or mental disabilities, including those who lack the capacity to manage their own finances. Special needs trusts are crafted with the specific needs, lifestyle, and future of the beneficiary in mind. Special needs trusts often are used to ensure that the beneficiaries don't lose government benefits they are receiving. If you have a child who receives Social Security benefits, then you may want to consider this kind of trust. The special needs trust pays for things not covered by government benefits.
Which trusts are appropriate for you depends on your estate planning goals, the value of your assets, and the goals you have for those assets. Make sure you plan ahead, and plan for the inevitable, smartly!
