Wills and Trusts
The two most commonly known pieces of an estate plan are the Will and Trust. A will is a document that dictates how assets that are only in your name, without a designated beneficiary, are to be distributed after your death. Asset distribution happens in probate court. Wills have a variety of requirements to be considered valid. A will cannot be changed after it becomes effective when you die. Thus, it is critical it is done correctly.
However, while a will is a key component to an estate plan, it is not the preferred way to transfer assets. Probating a person's assets takes a long time and can be very expensive. A trust can be much more effective at achieving the same goals.
A trust is a legal entity, where a person holds title to property for the benefit of someone else. Trusts come in a variety of types, with varying tax, asset protection, and legal consequences. A trust is a crucial component in an estate plan. Trusts are not only for the very wealthy; they are helpful to anyone who wishes to protect or help other people. Below are a few of the main types of trusts.
In a Revocable Trust, the individual who creates the trust retains the ability to remove assets at any time. Revocable Trusts are a popular way to retain control over your assets while preventing them from probate.
An irrevocable trust, as the name implies, cannot be withdrawn at the choosing of the individual who creates the trust. Once created, the assets placed in an irrevocable trust follow the terms of the trust. There are tax and legal advantages, which is why these are a popular estate planning tool.
Qualified Terminal Interest Property, or QTIP Trusts, are utilized for transfers between spouses. It relies on the martial gift exclusion to transfer property to the successor spouse.
Grantor Retained Annuity Trust (GRAT)
GRAT trusts allow an individual to transfer assets to an irrevocable trust but retain the income produced. The property will eventually be transferred, tax-free, to the recipient(s).
Special Needs Trust
Special Needs trusts are utilized for disabled individuals, either physically or mentally. A special needs trust will allow the individual to utilize the assets while qualifying for needs-based programs.
A Spendthrift Trust places an separate individual between the funds and the recipient. A fiduciary will control distribution of funds, rather than giving the entire amount to the individual. A Spendthrift Trust is generally beyond the reach of creditors.
This is only a sample of the types of trusts; there are a significant number of other trust types with other advantages. As always, consult with your tax and legal advisors when compiling your estate plan.
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