Ever wonder why people put some or all of their assets into trusts? Some affluent financial consumers use trusts for their estate tax advantages, but anyone can benefit from the privacy and control a trust can offer. Here’s what you need to know.
TWO BASIC TYPES
There are dozens of different types of trusts, but they fall into one of two categories: revocable or irrevocable. As their names imply, you can revoke the conditions of a revocable trust, but usually can’t change the terms of an irrevocable trust.
This difference matters greatly if you’re looking to reduce estate taxes, because only an irrevocable trust can shield your estate from them. While recent changes have greatly increased the federal estate tax exemption, many states still have much smaller exemptions. Note that for either type of trust to shield your assets from taxes or the public glare of probate, you will need to give ownership of the assets to the trust.
Within these two categories, there are separate trusts meant specifically to shield your home, life insurance benefits and future charitable contributions. Other trusts can preserve a deceased spouse’s estate tax exemption, fund the expenses of a special-needs child and pass tax-advantaged assets to grandchildren.
CONSIDERATIONS
Those who prefer a revocable trust typically do so for the flexibility to change its terms. However, in addition to not shielding assets from estate taxes, this type of trust doesn’t protect against creditors’ claims. An irrevocable trust will accomplish these two things, but changing its terms can be next to impossible. Still, an irrevocable trust may be the appropriate choice for a family with significant assets.
If you believe a trust may work for you, first understand the costs and consequences of creating a trust and putting assets into one. An estate planning attorney can help you draw up a trust for anywhere from a few hundred to a few thousand dollars, depending on its complexity.