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Understanding Trusts

Summary: Trusts are a fiduciary agreement to allow a third party to manage your assets until the terms of the trust have been met. The third party will then release the assets to a beneficiary. Trusts are an important part of the estate planning process, especially for those with high-net worth and large estates. Estimated Read Time: 7 min

Table of Contents:

  1. What is a Trust?
  2. Should I Have a Trust?
  3. Will vs. Trust
  4. Types of Trusts
  5. Which Trust is Right for You?
  6. How to Set Up a Trust
  7. Continue Learning about Senior Estate Planning

Trusts are one of the most popular ways to distribute your wealth and assets to the next generation. As a crucial part in the estate planning process, understanding how to create a trust can help you determine how you wish to distribute your assets.

Below, we review what a trust is, the different types of trusts, and how to create a trust for your assets.

What is a Trust?

A trust is a legally bound agreement that allows a third-party trustee to hold assets on behalf of a beneficiary until the terms of the trust have been met. A trust is also otherwise known as a fiduciary agreement.

Each trust is different, so the stipulations of when and how the assets can be released to the beneficiary can change based on the rules of the trust as set by the original owner of the assets.

With a trust in place, you have more control over how your assets are distributed and even have the option to help reduce the tax burden on those receiving your assets. Establishing a trust is one of the most common ways to ensure the passage of generational wealth to your loved ones.

By setting up a trust, you can determine exactly who will receive your assets and when they will be distributed. Depending on the type of trust you create, you can also put in place certain criteria that must be met in order for the beneficiary to receive your assets.

When the criterion of the trust is met, assets become available to the beneficiary.

Should I Have a Trust?

Creating a trust is one of the most important steps when estate planning.

For high net-worth individuals, having a trust in place well before retirement is encouraged. However, there is not specific timeframe in which a trust must be established.

If any of the following apply to you, you may want to consider creating a trust:

  • High net-worth
  • Large estate owner
  • Several heirs

Additionally, if you are the only working spouse in your relationship, you may want to set up a trust for your spouse to inherit your estate once you have passed. This way, there will be no question of what should rightfully be passed to them.

For individuals who wish to have a sense of privacy when distributing their wealth, a trust is a useful tool as it typically bypasses the court system, and your estate does not become a matter of public record.

This can also help if your heirs have large debts. When distributed by a trust, creditors do not have access to the funds thus they cannot be used to settle any outstanding debts of your beneficiaries.

Will vs. Trust

A will and a trust are similar, but it is important to understand the key differences that separate a trust from a will.

The main difference between a trust and a will is that a trust is a legal arrangement where assets are held by a third-party until the stipulations of the trust have been met whereas a will is a legal document that outlines how a person’s assets will be distributed after their death.

Trusts provide a greater sense of flexibility and privacy when compared to wills, as the latter usually have to go through the court system and become entered into public record. A few key differences of wills and trusts include:

  • A trust takes effect as soon as it is created and can be distributed during your lifetime. A will does not go into effect until after you have passed.
  • Wills can be contested in court. Trust cannot be disputed and must be fulfilled exactly as it is written.
  • A will can take months or even years to be distributed. A trust typically goes into effect immediately after the stipulations have been met.

Like a trust, a will is an important step in the estate planning process for seniors and should not be overlooked.

Types of Trusts

There are several types of trusts available, but not all trusts are right for you. It is important to work closely with an estate planning attorney to understand the type of trust that best suits your goals.

In addition to the baseline benefits of creating a trust, each type of trust offers additional benefits that can help your specific situation.

Some of the most common types of trusts include:

Marital “A” Trust

A Marital or A Trust is designed to provide assets to a living spouse in the event of your death. This typically includes real estate, savings accounts, and other assets necessary for your living spouse.

Bypass “B” Trust

A Bypass or B Trust is designed to bypass the living spouse’s estate in order to avoid estate taxes. This is also known as a credit shelter trust.

Testamentary Trust

A testamentary trust will be outlined in a will and covers any taxes implemented on distributed assets.

Irrevocable Life Insurance Trust

Irrevocable Life Insurance Trusts are designed to exclude life insurance income from your estates taxable income once you have passed. This income will be distributed to your beneficiaries without tax implications.

Charitable Lead Trust

A Charitable Lead Trust allows you to set aside a specific dollar amount to go to a charity of your choice.

Charitable Remainder Trust

A Charitable Remainder Trust allows you to designate a monthly dollar amount to go to a charity and the remainder to go to the beneficiary of your choice for a pre-determined amount of time.

Generation-Skipping Trust

A Generation-Skipping Trust allows assets to be distributed to grandchildren or later generations without a tax implication.

Qualified Terminable Interest Property Trust

A QTIP Trust allows you to provide income to a living spouse. Upon their death, the assets will be distributed to a named dependent without tax implication.

Grantor Retained Annuity Trust

A GRAT Trust allows you to pass assets as gifts to beneficiaries during the grantors lifetime in order to shift the appreciation on quickly appreciating assets.

Which Trust is Right for You?

 When choosing the right type of trust for you, your relationship with the beneficiaries you choose and the assets you distribute are two of the most important factors in determining the right kind of trust for you.

Additionally, you’ll want to thoroughly review the tax implications of each type of trust, whether or not the trust can be revoked during your lifetime, and whether or not you want access to control the trust or have a third party control the assets.

Typically, trusts are put in place to avoid tax penalties and allow a smooth transition of assets. This makes the estate planning process a breeze for both the grantor and the beneficiaries.

How to Set Up a Trust

When setting up a trust, there are five main steps you should follow to ensure your trust is properly executed and legally binding.

Step 1: Determine the Need for a Trust

Before you set up a trust, you should have an idea of the assets you wish to distribute, why you want to distribute them, and to whom they should be distributed to. Understanding each of these concepts will lay the proper foundation for your trust and ensure you choose to set up the right kind of trust.

There are a few questions you should keep in mind when determining the need for a trust:

  • Do you want to ensure your spouse has access to your funds when you pass?
  • Do you have several heirs and wish to determine exactly what and how much each person receives?
  • Do you want to avoid estate taxes?
  • Do you want a legally binding agreement that cannot be disputed?
  • Who do you want to manage the trust?

Once you have answered these questions, you should be able to determine the best type of trust for you.

Step 2: Confer with a Trust Advisor or Lawyer

It is always recommended to work with an estate planning attorney when creating a trust. Unlike a will, it is not easy to create a trust on your own. Your lawyer will need to look over various aspects of your trust such as the property allocation and tax mitigation.

It is best to not compose your trust document until you have had it reviewed by a professional.

Step 3: Compose Your Trust Document

Arguably the most important step in creating a trust is composing the document. There is no room for error in this step and in many cases, once notarized, it cannot be changed.

Your trust document should clearly establish the holder of your trust, beneficiaries, and any stipulation in place for distributing the assets.

Step 4: Get the Trust Agreement Notarized

Once your trust document has been composed and reviewed by an attorney, it is time to notarize the document. Notarizing the document will authenticate the trust and lock in the details as set by you and your attorney. Depending on your state, several witnesses may need to be present in order to notarize the document properly.

Step 5: Create Your Trust

After notarizing your trust document, it is time to set up a trust bank account and fund the account with your assets. If any real estate or property is listed in the will, the name on the deeds or titles should be moved into the name of the trust account. For ongoing contributions, you should name your trust as a beneficiary to any income streams that will be funding the account.

Continue Learning about Senior Estate Planning

Creating a trust is not a complicated process. However, it does require attention to detail. If you need help creating a trust, there are several resources available to you both online and in person.

To continue learning about estate planning for seniors, the next page of our online guide discusses everything you need to know about appointing a power of attorney.

Sources

MedicareFAQ is dedicated to providing you with authentic and trustworthy Medicare information. We have strict sourcing guidelines and work diligently to serve our readers with accurate and up-to-date content.

  1. What is a Trust, Fidelity. Accessed March 2024.
    https://www.fidelity.com/life-events/estate-planning/trusts
  2. Trust basics, Bank of America . Accessed March 2024.
    https://www.privatebank.bankofamerica.com/financial-education/understanding-trusts.html
  3. What is a Trust and Why do I Need One?, TIAA. Accessed March 2024.
    https://www.tiaa.org/public/learn/retirement-planning-and-beyond/what-is-a-trust
  4. Definition of a Trust, IRS . Accessed March 2024.
    https://www.irs.gov/charities-non-profits/definition-of-a-trust
Kayla Hopkins

Kayla Hopkins

Content Editor
Kayla Hopkins is an accomplished writer and Medicare educator serving as the Editor of MedicareFAQ.com. Upon completing her Communications degree from Ohio University, Kayla dedicated her time to understanding the ever-evolving landscape of healthcare. With her extensive background as a Licensed Insurance Agent, she brings a wealth of knowledge and expertise to her writing.
Ashlee Zareczny

Ashlee Zareczny

Compliance Manager
Ashlee Zareczny is the Compliance Manager for MedicareFAQ. As a licensed Medicare agent in all 50 states, she is dedicated to educating those eligible for Medicare by providing the necessary resources and tools. Additionally, Ashlee trains new and tenured Medicare agents on CMS compliance guidelines. Ashlee is a Medicare expert who specializes in Medicare Supplement, Medicare Advantage, and Medicare Part D education.

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