For all intents and purposes, a trust is considered its own entity. Trusts are legal documents, but they are also taxed separately from those to whom the assets within a trust will be distributed.
Trusts are used in estate planning to transfer assets to beneficiaries. Trusts have some advantages over wills, including skipping probate. That's pretty basic. But it gets complicated when you try to figure out which type is right for you. Know the options available to help you make an informed decision.
If you think you may face a gift tax issue, you may want a qualified personal residence trust—a type of irrevocable trust that can remove a house from an estate to reduce gift taxes when transferring it. Here's how it works: The taxable portion of your house is considered a future interest gift, but you can minimize it by using the estate and gift exemption.
If you dither and procrastinate over creating even a straightforward will or simple trust, you put the future finances of your family and loved ones in jeopardy. You risk that the assets you have worked for a lifetime to accumulate or protect will not be distributed as you would wish.
We like to imagine that a death brings families together in grief, but that's not always the case. Sometimes, the daughter of the deceased will announce that her mother had promised her the picture that always hung on the living room wall, but then the son pipes up that the picture was promised to him. Both have memories and emotions associated with the picture, so the fight can get acrimonious fast, potentially leading to a split family in which siblings aren't communicating. The purpose of a well-drafted will is to give clarity to your wishes to make sure this doesn't happen to your family.
When you use a trust, you bypass probate, a lengthy legal process that validates your will, and you leave precise, legally binding instructions for how to distribute and potentially maintain your assets. Have a beneficiary with special needs who's ill equipped to manage the inheritance? Bequeathing complex assets that require ongoing attention after you're gone? A trust can help.
When you're making your estate plan, you can choose between many types of trusts. But whichever kind you choose, you'll have to select a trustee to oversee your and your loved ones' assets. Understandably, this important decision may give you pause. You need someone who will act in your heirs’ best interests.
When people think of trust funds, they think of large estates and dynastic wealth. For most people, the conventional wisdom goes, estate planning doesn't have to go beyond making a will. But actually, even people of modest means may find a trust an essential part of an estate plan. Below are a few scenarios when a trust becomes essential.
Making a will is the primary way to transfer ownership of your belongings after your death. You’ll often hear that a will should be a comprehensive list of your assets so that they can be found quickly and easily without your estate undergoing probate. But there are some things you can’t or shouldn’t include in your will. For example, certain types of property can best be transferred without one.
A spousal lifetime access trust (SLAT) is an irrevocable trust that authorizes the trustee to make distributions to a spouse if a need arises. It can be designed to benefit one's children, grandchildren or future generations. A lifetime gift tax and a generation-skipping tax exemption can be used to shield contributions to the trust and future appreciations from transfer taxes.
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