What Assets Should Be Included in Your Trust?

One of the largest financial planning misconceptions people hold is that having a will ensures their property will transfer quickly to their heirs. The truth is, whether you have a will or not, your assets will go through the probate process when you die.

Probate can be a rather lengthy and costly process for your heirs. The procedure can extend from a couple of months for a simple estate, to a couple of years for a more complex estate. For most people, ensuring their property is preserved and passed on at the lowest possible cost is essential to a comprehensive estate plan.

Advantages of Revocable Living Trusts

A revocable living trust is an instrument created for the purpose of protecting your assets during your lifetime. It also creates an avenue to pass your assets with ease after your death. There are several benefits of creating a trust. The chief advantage is to avoid probate. Placing your important assets in a trust can offer you the peace of mind of knowing assets will be passed onto the beneficiary you designate, under the conditions you choose, and without first undergoing a drawn-out legal process. A trust can also provide you with some level of privacy as to the information shared about your estate. Another feature is that placing your assets in a trust will help protect them should you become incapacitated.

Can I Avoid Probate with a Trust?

It is important to note that there is no way to completely bypass probate. While your most important assets may be transferred as part of your trust, there are some assets that will not fund your trust for a variety of reasons. These other assets will still go through the probate process. Though setting up a trust can be costly and complex, it can make the inheritance process easier on your beneficiaries. To ensure your trust performs as it was intended, timely and proper funding is vital.

What Type of Assets Go into a Trust?

Many people assume that once they sign the trust documents at their attorney’s office, they are ready to roll. Setting up a trust, however, is only half of the solution. For a revocable living trust to take effect, it should be funded by transferring certain assets into the trust. Often people fund a living trust with real estate, financial accounts, life insurance, annuity certificates, personal property, business interests and other assets. The most notable types are outlined below:

Real Estate: Many people wonder whether it is a good idea to place their house in a trust. Considering that your home is potentially one of your largest assets, living trusts can be especially beneficial as they can transfer real estate quickly. Additionally, they help avoid the hassle of separate probate proceedings for land, commercial properties and homes that are owned out of state or held in different counties. Any property with a mortgage, however, would require refinancing into the name of the trust, and some lenders may be reluctant to do this.

Financial Accounts: There are several types of financial assets that can be owned by a trust, including:

  • Bonds and stock certificates
  • Shareholders stock from closely held corporations
  • Non-retirement brokerage and mutual fund accounts
  • Money market accounts, cash, checking and savings accounts
  • Annuities
  • Certificates of deposit (CD)
  • Safe deposit boxes

Funding your trust with bank and brokerage accounts generally requires new account paperwork in the name of the trust as well as signed authorization to retitle or transfer the asset. Likewise, physical bond and stock certificates require a change of ownership to be completed with the stock transfer agent or bond issuer. You may also wish to fund the trust with a checking or saving account, though it is important to carefully consider any implications if these accounts require regular withdrawals or activity. Additionally, while you may fund the trust with an annuity, these instruments already enjoy a preferential tax treatment, and transferring them may forfeit this benefit. With existing certificates of deposit, they are usually transferred to a trust by opening a new CD. When doing so, it is a good idea to see if your issuer will waive any penalties. Finally, safe deposit boxes may be issued to the trust, or ownership may be transferred for an existing box.

Life Insurance: Many people ask if it is a good idea to put life insurance in a trust. The benefits include protecting it from creditors and making it easier for your loved ones to access the money by avoiding probate. Naming the living trust as a beneficiary of your life insurance may come with some risks. If you are the trustee of your revocable living trust, all assets in the trust are considered your property. In this instance, life insurance proceeds are counted as part of your estate’s worth and could create a taxable situation should you reach the IRS threshold for taxable estates. In 2022, that amount is $12.06 million for an individual and $24.12 million for couples. Funding a trust with life insurance and annuity contracts generally requires a change of ownership form submitted to the contract issuer.

Valuable Personal Property: Personal items, such as jewelry, art, collectibles and furniture, including pianos or other important pieces, may be placed in a trust. Personal property without any legal certificate or title is commonly listed on an accompanying schedule that is kept with your trust documents. Those assets with certificates or legal title often require the owner to quitclaim their ownership interest to the trust.

Collectible Vehicles: Some cars retain their cash value for long periods of time and therefore may be worth transferring to your revocable living trust. It is worth considering the title transfers and taxes that may be imposed, so it is important to speak to a trusted financial adviser or lawyer before transferring such assets.

Can You Put a Business in a Living Trust?

There are a number of advantages of transferring your business interest into a revocable living trust. Benefits generally include providing relief to your family from carrying the burden of your business debts, as well as the potential to reduce the tax burden on your estate. Below are the effects of several types of business ownerships:

Sole Proprietorships: Transferring a small business during the probate process can present a challenge and may require your executor to keep the business running for months under court supervision. Often sole proprietors hold business assets in their own name, so transferring them to a trust would offer some protection for the family. For a sole proprietor, transfers to a trust behave generally the same as transferring any other type of personal assets you own, including your business name.

Partnerships: With partnerships, you may transfer your share in the partnership to a living trust. If you hold an ownership certificate, you will, however, need to have it modified to show the trust as the shareowner rather than yourself. It is important to note that some partnership agreements may prohibit transferring assets to living trusts, so you will want to consult a financial adviser or attorney.

Limited Liability Companies (LLC): Depending upon your operating agreement, LLC business owners often need approval from the majority of owners before they can transfer the interests in the company to their living trust. Once transferred, the voting ability remains with you, but your ownership share will fall to the trust.

What Assets Cannot Be Placed in a Trust?

There are a variety of assets that you cannot or should not place in a living trust. These include:

Retirement Accounts: Accounts such as a 401(k), IRA, 403(b) and certain qualified annuities should not be transferred into your living trust. Doing so would require a withdrawal and likely trigger income tax. In this instance, it is possible to name the trust as the primary or secondary beneficiary of the account, which would ensure the funds transfer to the trust upon your death.

Health Savings Accounts or Medical Savings Accounts:  Since these accounts already allow you to use the money tax-free for allowable medical expenses, they cannot be transferred to a living trust. Like retirement accounts, however, you can name the trust as the primary or secondary beneficiary.

Active Financial Accounts: It is not advisable to transfer accounts you use to actively pay your monthly bills unless you are the trustee and granted full control of the trust assets. For many people, it is simply easier to keep these accounts out of the trust.

Vehicles: Generally, everyday vehicles like cars, boats, trucks, motorcycles, airplanes or even mules or snowmobiles are not placed in a trust because they often do not go through probate, and unlike collectible vehicles, they are not appreciable assets. Additionally, many states impose a tax when the vehicles are retitled, and some do not allow vehicle owners to name a beneficiary after death.

A Word About Irrevocable Trusts

While the assets placed in an irrevocable trust are no longer vulnerable to creditors or subject to an estate tax, you forfeit ownership of the assets. Careful consideration should be made when using an irrevocable trust, and it is highly advised that you first consult your financial adviser or attorney.

While creating a living trust may be costly and require a lot of legwork to fund, there are many benefits to using it as an instrument to protect your assets. The flexibility these trusts offer helps to ensure that your assets are protected during your lifetime and pass easily to heirs after your death.

Estate laws vary from state to state. This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax adviser or lawyer.
Kris Maksimovich is a financial adviser located at Global Wealth Advisors 4400 State Hwy 121, Ste. 200, Lewisville, TX 75056. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (972) 930-1238 or at [email protected]
© 2022 Global Wealth Advisors

President and Founder, Global Wealth Advisors

Kris Maksimovich, AIF®, CRPC®, CRC®, is president of Global Wealth Advisors in Lewisville, Texas. Since it was formed in 2008, GWA continues to expand with offices around the country. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth.

Source: kiplinger.com

Inter-Vivos Trusts: How Do They Work?

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An inter-vivos trust or living trust is a legal arrangement that allows a person to transfer ownership of assets to a trust while they are still alive. Inter-vivos trusts distribute property to beneficiaries when a person dies and helps an estate avoid probate. A financial advisor can guide you through the process of creating an inter-vivos trust and address other estate planning needs.

How Inter-Vivos Trusts Work

While a testamentary trust takes effect when the grantor (person who created it) dies, an inter-vivos trust allows a person or married couple to transfer assets like money, real estate or investments to a separate entity while they are still alive.

An inter-vivos trust can be either revocable or irrevocable. When a living trust is revocable, the trustor can change or cancel it, and can even act as its trustee (person who manages the trust). An irrevocable trust, on the other hand, may not be changed once it is created. Assets transferred to an irrevocable trust cannot be transmitted back to the original owner.

Whether it’s revocable or irrevocable, an inter-vivos trust must have someone assigned as the trustee. Even if the person who established the trust opts to serve as trustee, they still must name a successor trustee to manage the trust when they die. A grantor must also name beneficiaries who will receive assets from the trust at the time of their death.

Last but not least, an inter-vivos trust does not render a will unnecessary. In fact, a will is still needed to execute the trust. Wills can also serve as a backup of sorts and account for any assets not included in the trust. For instance, if you acquire real estate later in life and never added it to the trust, a will can ensure the property is transferred to the proper person at the time of your death.

Advantages of Inter-Vivos Trusts

Property transferred to an inter-vivos trust is not subject to probate, the legal procedure by which a deceased person’s will is processed. This court-supervised process ensures that an estate’s assets are inventoried and distributed properly and that its debts are paid.

By skipping these lengthy and potentially costly proceedings, the assets held by a trust can be smoothly transferred to beneficiaries without becoming public record like a will do.

There are also specific benefits associated with revocable and irrevocable living trusts. A revocable trust gives the grantor the option to add new beneficiaries, remove assets or make other changes. While flexibility is the main advantage of a revocable trust, their counterparts offer more protection for the assets they hold. When a grantor establishes an irrevocable trust, they give up ownership of the assets held by the trust, which protects them from creditors.

How to Create an Inter-Vivos Trust

There are two primary ways to create an inter-vivos trust: enlisting the help of a professional or doing it yourself. A financial advisor, especially one with the accredited estate planner (AEP) designation, or an estate planning attorney can streamline the process for you and ensure that your trust is created properly.

However, a basic living trust doesn’t have to be overly complicated and can even be set up online. If you’re looking to go it alone, you will first need to decide what kind of trust you want to establish and the assets that you’ll transfer to it. Next, you’ll have to pick a trustee and beneficiaries. Then, you’ll create a Declaration of Trust online and sign it in front of a notary. Lastly, you’ll need to transfer the titles of trust property to the trustee (even if it’s you) and then safely store the document.

While it may save you money, be aware of the potential pitfalls and dangers of DIY estate planning, which can create additional problems for beneficiaries when you’re gone.

Bottom Line

An inter-vivos trust is an estate planning tool that helps a person or couple transfer assets to beneficiaries without exposing their estate to the probate system. While some trusts go into effect when a person dies, an inter-vivos or living trust is created when the grantor is still alive. They can be revocable or irrevocable, and can be created with the help of a professional or one’s own.

Estate Planning Tips

  • As mentioned above, a financial advisor who specializes in estate planning can help you navigate what can be a complicated process of planning an estate. SmartAsset’s free matching tool can pair you with up to three local advisors in a matter of minutes. If you’re ready to find a professional, get started now.
  • Depending on the size of your estate and where you live, your assets may be subject to state or federal estate taxes. But remember that up to $11.7 million in assets are exempt from federal estate taxes in 2021. Married couples are also permitted to tap their spouse’s unused portion of this exemption limit, effectively allowing couples to transfer a combined $23.4 million to beneficiaries free of federal estate taxes.

Photo credit: ©iStock.com/Andrii Dodonov, ©iStock.com/fizkes, ©iStock.com/shapecharge

Patrick Villanova, CEPF® Patrick Villanova is a writer for SmartAsset, covering a variety of personal finance topics, including retirement and investing. Before joining SmartAsset, Patrick worked as an editor at The Jersey Journal. His work has also appeared on NJ.com and in The Star-Ledger. Patrick is a graduate of the University of New Hampshire, where he studied English and developed his love of writing. In his free time, he enjoys hiking, trying out new recipes in the kitchen and watching his beloved New York sports teams. A New Jersey native, he currently lives in Jersey City.

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Source: smartasset.com

What Is the HEMS Standard in Estate Planning?

The "HEMS" (health, education, maintenance, support) standard in estate planning is used to guide trustees in how/when they should release funds to a beneficiary.

The HEMS standard is used in estate planning to guide trustees in how and when they should release funds to a beneficiary. By including HEMS language in a trust, you can exert greater control over how the trust’s assets are ultimately spent and for what purpose, including health and education expenses. This can be especially useful if a trust’s beneficiary is young or financially inexperienced. A financial advisor who offers estate planning services can help you set up a trust that meets the needs of you and your beneficiaries.

What Is a HEMS Provision?

HEMS is an acronym that stands for health, education, maintenance and support. When assets are distributed to the beneficiaries of a trust with a HEMS provision, the money can only be used for specific needs tied to the beneficiaries’ health, education or living expenses. These may include college tuition, mortgage and rent payments, medical care and health insurance premiums.

Here’s a look at some examples of HEMS distributions:

HEMS Standard: A Breakdown Health Education Maintenance and Support Medical treatment Tuition for all levels of education Mortgage or rent Health insurance College housing and dining Taxes Eye exams and dental care Career training Insurance Prescription drugs Studying abroad Customary vacations Some elective procedures Books Gifts for family members Gym memberships  Other support Reasonable comforts

While a HEMS provision gives a trustee guidance on how assets should be distributed (the trustee ultimately has the discretionary authority to decide whether an expense qualifies). This can be relatively straight forward when it comes to the health and education components of a HEMS provision, but the maintenance and support category can be more ambiguous. That’s because maintenance and support can include distributions that allow a beneficiary to maintain their typical standard of living, which can even include travel and vacation expenses.

Benefits of HEMS

The "HEMS" (health, education, maintenance, support) standard in estate planning is used to guide trustees in how/when they should release funds to a beneficiary.

Having a HEMS provision in your trust can be beneficial in several ways. First, by limiting what types of distributions are allowed, you’ll better ensure that the assets held in the trust are not spent frivolously. This can be especially important if the trustee is also a beneficiary. By establishing certain restrictions, the odds of the trust being drawn down too quickly diminish.

Second, by giving the trustee guidelines for how assets should be distributed to beneficiaries, you’ll make their job that much easier. A HEMS provision can narrow the vast discretionary authority that some trusts endow their trustees and can help them better preside over the entity.

Lastly, HEMS language isn’t one size fits all. It can be as specific or broad as you like. For example, you can establish a trust whose assets can only be distributed to pay college tuition or the long-term care of a sick or disabled beneficiary. Another grantor may not include such specific language and instead give the trustee broader discretion to allocate assets for any health, education, maintenance and support expenditures.

Bottom Line

The "HEMS" (health, education, maintenance, support) standard in estate planning is used to guide trustees in how/when they should release funds to a beneficiary.

The HEMS standard is used in estate planning to ensure assets in a trust pay for the health, education, maintenance and support of a beneficiary. A HEMS provision can help guide a trustee and protect assets from being spent too quickly. Common examples of expenses that warrant a HEMS distribution are college tuition and medical care, as well as mortgage or rent payments.

Estate Planning Tips

  • Estate planning can be a complicated and stressful proposition for someone without proper guidance. A financial advisor who specializes in estate planning can help you create a plan that will ensure your loved ones are taken care of when you’re gone. SmartAsset’s free tool can match you with up to three financial advisors in just five minutes. If you’re ready, get started now.
  • If you have a considerable amount of assets, it’s important to familiarize yourself with the laws surrounding estate and gift taxes. While the federal government charges both estate and gift taxes, some states have their own death taxes that you’ll want to consider while planning your estate.

Photo credit: iStock.com/FatCamera, iStock.com/Yagi-Studio, iStock.com/Jovanmandic

The post What Is the HEMS Standard in Estate Planning? appeared first on SmartAsset Blog.

Source: smartasset.com

A Plan for Rover After You’re Gone

Pets are cherished family members, but it’s the rare owner who considers what will happen to a four-legged friend if the worst occurs. An owner’s illness or death remains one of the top 10 reasons pets are relinquished, according to the National Council on Pet Population Study and Policy.

For your pet to be cared for financially and physically after you’re gone, your estate plan needs to include those arrangements. “Talk to your attorney, evaluate your state’s laws, and assess your resources,” says Steven Maughan, vice president of planned gifts and estates at the Humane Society of the United States. Many of the same estate-planning tools you’d use to take care of your human dependents can also protect your pets.

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Concept art with a picture of a will next to a gavel. Concept art with a picture of a will next to a gavel.

Take your will, for example. It could list a trusted caretaker for your pet, along with an alternative if your first choice falls through. You should set aside money in your will for your pet’s care with an explanation of how the funds should be spent. For the amount needed, multiply the annual cost of care for your pet by its life expectancy and include extra funds for unexpected medical expenses. You may want to add a separate document, called a letter of instruction, describing your pet’s routine, food and medication.

Even with those provisions, however, the caretaker is not legally obligated to follow your instructions, spend the money as you intended or send the pet to another caretaker that you’ve named. Once the money is distributed to the caretaker, it’s an honor system.

Another downside of wills is that they require a costly and lengthy legal process. “A will is a ticket to probate court,” says Rebecca Wrock, an estate-planning attorney at the law firm Varnum in Ann Arbor, Mich. “Everything is public record, and all heirs of the deceased are notified of proceedings so there is more opportunity for a gift to the pet to be contested.” The average probate process in the U.S. costs about 10% of the estate, according to LegalZoom.

Probate can also take months, sometimes years. Without a designated emergency caregiver during that time, your pet could be rehomed or taken to a shelter and euthanized, says Anne Trinkle, executive director of Animal Alliance of New Jersey & Planned Pethood Spay/Neuter Clinic in Lambertville.

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A man signs a legal document. A man signs a legal document.

A pet trust, however, bypasses probate and provides more legal protections. Depending on your state’s laws, you could set up either a revocable pet trust, which can be changed or canceled during your lifetime, or an irrevocable pet trust that can’t be reversed. A pet trust can be completely separate or part of an existing trust that encompasses your other assets. The national average cost of a living trust ranges between $1,100 to $1500, compared with $10 to $600 for a simple will, according to LegalZoom.

Along with appointing a trustee to manage the trust’s finances, you name your pet’s caretaker (who could also serve as the trustee), any alternative caretakers, as well as an optional trust protector for added oversight of the trustee given that the beneficiary — your pet — can’t defend its own rights. Unlike a will, the caretaker has a fiduciary duty to follow your letter of instruction if you include one.

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Legacy Arrangements

A dog licks a veterinarian. A dog licks a veterinarian.

If you can’t find a willing caretaker, ask an an organization, an animal retirement home, veterinary school, animal sanctuary or rescue group if it will care for your pet after you’re gone. Some may require payment for your pet’s care. If not, include a donation to the organization in your will. Michael Ettinger, president of Ettinger Law Firm in New York, likes private animal sanctuaries. In one case, a client’s dog was taken in by a pet hotel, which played back-to-back videos of the owner to comfort the grieving dog.

No matter which option you choose, make sure your pet’s future caretaker agrees to take on that role. “We’ve received calls from people stunned that they were designated as a pet’s caretaker,” Trinkle says, so discuss the arrangement in advance. “And obviously, they have to be pet lovers.”

Source: kiplinger.com

A Smart Option for Transferring Wealth Through Generations: The Dynasty Trust

Under the new Biden administration, the president has made his intentions clear about the potential to change the tax code.

I believe tax increases are forthcoming; he’s already stated his position on income taxes and capital gains taxes as well as estate tax exemption amounts. These factors should motivate many people to explore their options.

What should you do regarding estate planning?

There are various types of planning strategies today that make a lot of sense and that people should think about implementing before the tax laws change. Try to do the planning now because the planning opportunities today are very favorable, especially if you have assets you intend to gift in the future.

The question is, where are you going to gift them?

The problem with outright gifts

Estate taxes are due upon the deaths of Mom and Dad when assets are ultimately transferred to the children or grandchildren. In most circumstances, assets are transferred outright, free of trust, which means the assets are distributed free and clear from all oversight and directly to the beneficiary. A check is made payable to the beneficiary or assets are titled in the beneficiary’s name, and the beneficiary does as he or she wants with the inheritance.

The problem is if you transfer assets outright, you are exposing those same assets to a second generation of estate taxes. And if you try to transfer assets directly to your grandchildren, you could be exposing those assets to a third set of taxes called generation-skipping transfer tax (GSTT). That is the dilemma. Most people I deal with who want to include their grandchildren in their planning just do not realize those assets could be subject to another tax due.

Today, if you own a Family Limited Partnership (FLP) or Limited Liability Company (LLC), possibly owning real estate or having a large equity portfolio, these assets offer tremendous gifting and wealth transfer opportunities. You do not even have to give up control of these assets, you just must want to provide for your family one day in the future and protect them for always.

If you believe, “As parents, we never stop being parents even after we’re gone,” then this type of planning is for you. The question is, what entity do you gift your assets to that makes sense? My suggestion is you use a dynasty trust. This type of trust was made famous by wealthy families such as the DuPonts, Fords, Carnation and Kennedys, but it is a viable tool for everyone to use.

Enter the dynasty trust

A dynasty trust is created to transfer wealth from generation to generation without being subject to the various gift, estate and/or GSTT taxes for as long as the assets remain in the trust, based on applicable state laws. In addition, a dynasty trust can protect those assets from creditors, divorcing spouses and other issues.

A lot of people use an irrevocable life insurance trust (ILIT), and they transfer the assets free of trust upon death. And most living trusts are transferred the same way, without the benefit of being held within trusts.

Why not transfer assets in trust and protect those assets? You are not taking anything away from your children, and all you are doing is adding a layer of asset protection and protecting them for generations to come.

How a dynasty trust works

A dynasty trust is created in most cases by Mom and Dad. It can include almost any type of asset — life insurance, any type of securities you want to gift, limited partnership interests, etc. — other than qualified retirement plans. The assets are held within the trust, and when the grantor passes away, the trust can automatically subdivide into as many new trusts as you have named beneficiaries in the trust. This is a bloodline trust.

So, if you have three children, it divides into three new trusts, dividing the assets equally among the three. When each child passes away, the trust subdivides again for their children (your grandchildren) in their respective trusts, and again the assets are divided into equal shares.

The trust offers broad powers for health, welfare, maintenance and support. So, the children can use the money as they deem appropriate, investing it or taking income out, etc. The trust is protected, and all assets and the growth thereof held in that trust avoid estate taxes when structured correctly. You must have a trustee or co-trustee, and a qualified estate planning attorney drafting and executing the documents.

Including life insurance in your trust compounds the future liquidity of the policy, and there are different ways to pay for the life insurance in this trust through the various gifting options available.

Let us assume you have a limited liability company that owns real estate, and you want to transfer that real estate to the children one day in the future. Why not gift non-managing member shares of that same LLC to the trust, and allow those shares to generate enough income to buy life insurance within the trust? Think about this: You are taking a tax-favored and leveraged asset — life insurance — and now making it tax-free for generations to come. Life insurance is a very effective vehicle for wealth transfer planning. Additional advantages of this planning: no annual gift tax returns and no Crummey letters required. When you gift assets for life insurance or various outright gifts you use a vehicle called Crummey gifts (named after the subject of a landmark tax case in 1968), otherwise you could be subject to taxation on the gift.

If you want to protect your children, their children, and your great-grandchildren, and provide for them, put a dynasty trust together, buy life insurance, and you are on your way.

Dan Dunkin contributed to this article.

Investment advisory services offered through Laurel Wealth Advisors Inc., a Registered Investment Adviser. Annuities are insurance products that may be subject to restrictions, surrender charges, holding periods, or early withdrawal fees which vary by carrier. Riders are generally optional and have an additional associated cost. Annuities are not bank or FDIC insured. Investing involves risk, including the potential loss of principal. Any references to protection benefits, safety, security, lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.

Founder, Wealth Preservation LLC

Stewart J. Weissman is founder of Wealth Preservation LLC (wealthpreservationllc.com), a California-based independent financial services firm offering estate planning, life insurance, retirement planning and wealth management. Stu also hosts the “Safe Money & Income” radio show.

Source: kiplinger.com

What a Beneficiary Controlled Trust Can Do to Protect Your Legacy After You Are Gone

Many estate planners believe that their job is done when the beneficiaries avoid probate and receive their inheritance. However, when beneficiaries receive their inheritance in their name outright, that needlessly exposes the legacy you leave to the claims of creditors, lawsuits, divorce, the loss of governmental benefits they might otherwise receive and even a second estate tax when they die. “Outright” distributions from the trust to the beneficiary in his or her name should rarely occur for large or even relatively modest estates.

A better approach is for each beneficiary’s inheritance to go into his or her own Beneficiary Controlled Trust. If properly drafted and funded, the beneficiary can control, use and enjoy the inheritance with fewer risks than outright ownership. A Beneficiary Controlled Trust will help protect your loved ones from the bad things in life that may occur without any fault of your loved ones. For example, divorce, lawsuits, creditor claims, bankruptcy or even estate tax upon their death. Sadly, bad things happen to good people. On the other hand, a spendthrift trust is traditionally intended to be used for beneficiaries who are not trusted to make good financial decisions. A spendthrift trust is similar to a spigot on a hose. The trustee in his or her discretion can open the spigot to permit spending or close the spigot to restrict or prevent spending by the beneficiary.

Asset Protection with Plenty of Control

A Beneficiary Controlled Trust refers to a trust where the beneficiary may also be the controlling trustee. The beneficiary can be provided virtually the same control as he or she would have with outright ownership. For example, the beneficiary, as the controlling trustee, could make all investment decisions. Investments such as a home or brokerage account would be held in the name of the trust and would be better protected from lawsuits, divorce, creditors or predators.

After they inherit, the primary beneficiary could alter the level of control or protection if greater risks arose. They could appoint a  co­-trustee to control distributions or even investments. If the risk is very high, the primary beneficiary could even resign as trustee and appoint their best friend, trusted family member or professional to act as Trustee. We represented a beneficiary who was going through a contested divorce at the time she was inheriting funds from her mother. She designated her son to be the Trustee to further separate her inheritance from the divorce proceedings. We had a similar situation where a client was being sued regarding a car accident that resulted in a death. In that case, the client designated his best friend to act as the Trustee.

An HEMS Trust: Estate Tax Protection Comes with Vulnerability

If the primary beneficiary wants to act as the sole trustee with control over investments and administration, distributions can be limited to the beneficiary’s health, education, maintenance and support (“HEMS”) to avoid estate tax (the “HEMS Trust”). This structure is designated by the Grantor (or trust creator) in the trust instrument or document created. However, some states permit certain creditors, such as a divorcing spouse or health care providers, to pierce through the trust and access assets up to the HEMS standard.

If they obtain a judgment against the beneficiary, the price to be paid for the beneficiary’s additional control is potentially weaker creditor protection. A better approach, from a creditor protection standpoint, may be to empower the trustee to make discretionary distributions not tied to any specific standard.

Going with an Independent Trustee Instead

If the primary beneficiary of a Beneficiary Controlled  seeks even greater asset protection, then they can appoint an independent trustee who acts as the distribution trustee. The independent trustee is authorized to make distributions to the beneficiary in such amounts and at such times as may be determined in the sole discretion of that Independent Distribution Trustee (the “Discretionary Trust”). The Discretionary Trust generally provides greater asset protection irrespective of the beneficiary’s state of residence.

Considering what happened to Brittney Spears, the beneficiary may be concerned about giving such discretion to the Independent Distribution Trustee. This issue can be minimized by providing the primary beneficiary with the right to remove and replace the Independent Distribution Trustee. While the beneficiary does not have direct control over distributions, the beneficiary can select who does hold the power, so long as the person selected is not a related party or subordinate person.

2 Ways to Deal with the Tax Consequences of Trusts

Careful consideration must also be given to the trust income tax rules. The highest marginal federal income tax rate for ordinary investment income is now 37%. In 2021 the highest federal income tax rates are triggered with income for a single individual of $523,601 or more. For married taxpayers, the highest federal income tax rates are triggered with income of $628,301  or more. The highest marginal tax rate for a trust is also 37% in 2021 — but it is triggered with income of only $13,050. The difference in tax liability can be substantial.

To help deal with that tax issue, the Beneficiary Controlled Trust can be drafted in some cases to be a “Grantor Trust.” A Grantor Trust is a trust that is “disregarded” for income tax purposes. Income is taxed to the beneficiary without regard to whether the income is distributed to the beneficiary. A Grantor Trust will avoid application of the higher tax rates for a trust.

Alternatively, the Beneficiary Controlled Trust can be drafted as a “Complex Trust” for income tax purposes. The Complex Trust files a separate tax return. Income actually distributed to the beneficiary is taxed at the beneficiary’s lower individual tax rates. Only income not distributed by the Trust will be taxed at the higher trust income tax rates.

There is no single best approach, and careful analysis of the client’s goals, concerns and situation should always be analyzed. The Trust may, in some circumstances, have an ability to toggle, or switch, between a Grantor Trust and a Complex Trust.

As a general rule, a client with a substantial estate should always consider the protective features of a Beneficiary Controlled Trust. If you have any questions about this topic. Please contact the Goralka Law Firm.

Founder, The Goralka Law Firm

Founder of The Goralka Law Firm, John M. Goralka assists business owners, real estate owners and successful families to achieve their enlightened dreams by better protecting their assets, minimizing income and estate tax and resolving messes and transitions to preserve, protect and enhance their legacy. John is one of few California attorneys certified as a Specialist by the State Bar of California Board of Legal Specialization in both Taxation and Estate Planning, Trust and Probate.

Source: kiplinger.com

It’s Never Too Late for a Family Meeting – Here’s How to Do Them Well

Jane and John, who are parents to four adult children, have amassed substantial wealth during their careers. To experience the joy of seeing their children enjoy some of this wealth – and to take advantage of the current high federal estate tax exemption amounts – which could potentially be reduced – they would like to give away some of it during their lifetime.  However, they are concerned that their children and spouses might not be ready to handle the responsibilities of receiving large monetary gifts that could change their lives. 

Though well-intentioned, will the gifts become burdensome to their children? How can Jane and John ensure that their children and their families will be good receivers and stewards of their inheritance? While Jane and John may be hypothetical clients, their challenge is a common one.

Wealth education, or even the basics of money, is not part of the curriculum in most public schools.  If parents don’t take on that responsibility, young adults often leave home with little to no knowledge about the fundamentals of money management, such as banking, debt, saving and investing. There are many reasons these conversations aren’t had at home, especially for families of substantial wealth. Some parents feel that sharing information about their wealth would demotivate children and make them “trust fund babies,” while to others it is a reminder of their own mortality. Perhaps parents never had the conversation with their own parents growing up, so they find it a difficult and awkward subject to broach. Avoiding the subject seems like the easier and more pleasant path to take.

Regardless of how much wealth a family has, wealth education is crucial to overall financial education, preparing for the future, and to becoming a good steward of an inheritance. For parents who haven’t had conversations early, it’s not too late.

Family meetings are a thoughtful and effective way of bringing members of a family together with a goal of facilitating communication and education. They allow for sharing family stories, communicating values, setting goals to help ensure transparency, and helping members across generations understand their roles around stewardship and wealth.

How do you have an effective family meeting, one that its members not only value, but also look forward to?

  • Do some prep work. As an important first step, the hosts of the meeting should spend time with each participating family member to help them understand the reason for the meeting and learn more about what their expectations are. There should be a desire and commitment from the participants to invest time and effort to make family meetings successful.
  • Plan ahead. Setting a clear agenda that defines the purpose and goals of each meeting and sharing this agenda with participants before the meeting are a key to its success. Choose a neutral location that makes everyone comfortable and encourages participation.  Carving out part of a day during a family trip or while at a family vacation home are examples of neutral locations where families tend to be at ease.
  • Break the ice. Allow time for a fun ice-breaker activity to put people at ease. This could be an activity or a question (“What does the family business mean to you?” “What money messages did you receive, and what message would you like to pass on to your own children?”) that all family members answer.
  • Set aside time for learning. Include an educational component in the agenda, such as an introduction to investing, estate planning, budgeting and saving, or philanthropy.
  • Have a “parking lot.” Document subjects brought up that might need to be addressed in a future meeting. This shows members that everyone’s participation and input is valuable and that while a subject might not fit into the present agenda, it will be included in a future meeting.
  • Include a facilitator. Consider including a trusted adviser to facilitate the meeting. Having a facilitator present who is experienced in working with families of wealth can help with managing the agenda, offering a different perspective, calming emotions and making sure everyone is heard and understood.
  • Follow up. Include some “homework” and schedule the next meeting to set expectations about continuing to bring the family together. 

Correctly facilitated, family meetings can be a safe place for members across generations to communicate effectively and learn about stewardship. The goal is that the family unit will continue to flourish even after the first generation has handed over the reins to the next.

So, what happened to Jane and John? They sought the help of their adviser, who spent time upfront understanding their goals and getting to know their children and their spouses. They planned their first family meeting. During that meeting, the parents shared their story and communicated details about their values, goals and expectations.  Over the next few years, the family met several times and talked about a variety of topics. The children learned more about investing and opened their own investment accounts, to which the parents made gifts. They talked about estate planning and created their own estate plans. 

Following a meeting on philanthropy, the parents created a Donor Advised Fund so that the children could come together, recommend gifts to the charities of their choice and make joint decisions about charitable giving. These planned meetings brought the family together, nurtured relationships and strengthened the family unit. They came to understand their responsibilities as stewards of the wealth created by their parents and gained more confidence to build lasting wealth for the generations to come.   

Senior Family Wealth Adviser, The Colony Group

As a Senior Wealth Adviser at The Colony Group, Indrika Arnold provides clients with financial planning services while helping the firm develop and refine Family Office services. She is a financial professional with 15 years of experience. Indrika serves ultra-high net worth individuals and families, and she focuses on all areas of planning. She has a particular interest in helping to prepare the next generation to be responsible stewards of their inherited wealth.

Source: kiplinger.com

4 Reasons Families Fail When Transferring Wealth

Over the next 25 years, analysts anticipate $68 trillion to be passed down to younger generations and charities. While the importance of legacy planning is not limited to the forthcoming Great Wealth Transfer, it does spotlight the significant amount of wealth that has been created, primarily by Baby Boomers, and the need to transition these assets thoughtfully. A legacy plan, regardless of the size of a portfolio, is an essential component of the financial planning process, ensuring the assets an individual has spent their entire life accumulating will transfer to the people and organizations they want, and that family members are well-prepared to inherit and execute their wishes.

There are, however, four common missteps that can cause individuals and families to veer off track.

1 of 4

Failure to create a plan

A woman lounges on a couch lazily.A woman lounges on a couch lazily.

It’s difficult for individuals to think about their own passing, so this tends to push planning off “to another day.” Of course, if an individual passes before a plan is in place, their goals and wishes cannot be executed.

I guide clients to establish a legacy plan as early as possible. While every individual is different and there is no steadfast rule regarding when precisely to create a plan, sooner is almost always better. When an individual begins to envision or has a preference about where and how their assets are transferred – say it is passing down specific heirlooms, charities receiving a portion of wealth, or a family business transitioning to younger generations – it should trigger the need to put a plan in place.

Understand that a legacy plan can evolve over time; you don’t just set it and forget it. A plan should be rooted in what an individual or family envisions today, but with the flexibility to accommodate for changes in the future.

2 of 4

Lack of communication and trust

A man makes the universal symbol for "My lips are sealed."A man makes the universal symbol for "My lips are sealed."

A common, and hazardous, reason that legacy plans often don’t succeed is a lack of communication and trust. Not communicating a plan early on can create a rift between generations, especially if it is different than adult children might expect or incorporates other people and organizations that come as a surprise to heirs.

I’ve seen individuals have great success by bringing their adult children – who are in their 20s and 30s – into the conversation to establish the communication early on. If sharing monetary figures is uncomfortable, focus on the overall, high-level strategy instead, reviewing timing, familial values and what the plan seeks to accomplish. Open communication can mitigate negative feelings, such as distrust or confusion among family members, allowing for a more successful transfer.

3 of 4

Inadequate preparation

A yellow road warning sign reads "Oops!"A yellow road warning sign reads "Oops!"

Another reason families don’t succeed in transferring wealth is inadequate preparation among intended heirs. The ability to get individual family members on board with defined roles can be challenging, but it can alleviate a lot of potential headaches and obstacles down the road.

I frequently work with clients to coordinate a Family Alignment Day, where we review the vision and values of the plan and make sure everyone is on the same page. From there, we think through what everyone’s contribution to the plan can be – for example, if one family member is highly organized, perhaps they take control of coordinating family meetings to oversee the plan and ensure it remains on course to meet objectives on an annual basis.

4 of 4

Overlooked essentials

Looking through a magnifying glass at a $100 dollar bill hiding in grassLooking through a magnifying glass at a $100 dollar bill hiding in grass

While a broad bucket, the final reason plans don’t succeed is because of mistakes, such as overlooking tax implications or legal issues.

Enlist the help of professionals and create an “A-team”— composed of specialists, such as a financial adviser, tax professional and estate planning attorney — who can work in tandem to ensure the plan will meet its intended goals. For example, from a tax standpoint, professionals should flag upcoming legislative changes, as they could justify altering the plan. One instance of this: Many provisions in the Tax Cut and Jobs Act of 2017 will sunset after 2025, specifically impacting income tax rates and brackets, and estate and gift tax exemptions. 

Whether creating a legacy plan today, or as part of the millions of households in the Great Wealth Transfer that will establish plans soon if they haven’t already, preparation and flexibility are keys to wealth transfer success. Set up an accommodative plan early on, have open communication with family members, and review philosophies and values to make sure everyone is on the same page. This will leave loved ones with the ability to understand, respect and meaningfully execute the legacy plan’s objectives.

Senior Financial Adviser, Vanguard

Julie Virta, CFP®, CFA, CTFA is a senior financial adviser with Vanguard Personal Advisor Services. She specializes in creating customized investment and financial planning solutions for her clients and is particularly well-versed on comprehensive wealth management and legacy planning for multi-generational families. A Boston College graduate, Virta has over 25 years of industry experience and is a member of the CFA Society of Philadelphia and Boston College Alumni Association.

Source: kiplinger.com

What Is a Business Trust and How Does It Work?

What Is a Business Trust and How Does It Work? – SmartAsset Close thin Facebook Twitter Google plus Linked in Reddit Email

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When it comes to trusts, most people are familiar with individual trusts, trust funds or family trusts that are connected to an individual or family. But another type of trust exists for entrepreneurs and companies called business trusts, which are also known as common law trusts. A business trust is a legal instrument that can be used to delegate the authority to manage a beneficiary stake in a certain business. It can also be used to run the business itself. However, there are multiple types of business trusts, with each working slightly differently. If you’re thinking of using a business trust, it might be a good idea to consult with a financial advisor.

What Is a Business Trust?

Functionally, a business trust is quite similar to an individual or family trust. It helps delegate control of assets to a trustee, who manages the trust and its contents on behalf of the grantor. An individual trust typically contains assets such as money or property, but a business trust holds the rights to an individual’s stake or interest in a business. As a result, a business trust can be the legal entity that technically owns a business.

Business trusts can have one or multiple beneficiaries. A business can be owned by multiple trusts and entities or just a single one. They are primarily used to safeguard against taxes and liability, as trusts tend to have different legal protections than individuals. However, the specifics of these rules can vary by state.

How Does a Business Trust Work?

A business trust is a legal agreement. In turn, the process of creating one typically begins with a conversation between the involved parties and a trust lawyer who can help define the terms of the agreement. Following this, the trust is legally created through what is called a declaration of trust.

The declaration of trust details the terms of the trust and delegates instructions and responsibilities for the trustee. These may include the valid length of the trust and the duties, powers and interests of the beneficiaries. Once the terms are settled, the one who owns the trust signs the declaration, officially creating it in the process.

The trustee of a business trust has a fiduciary duty to act in the best interests of the beneficiaries of the trust. This is the same kind of fiduciary duty that applies to other financial situations. Most notably, SEC-registered financial advisors have a fiduciary duty to act in the best interests of their clients.

The trustee is the one who holds the rights and control of the business stake in the trust. It’s typically one individual serving as a trustee of a business trust. At the end of the trust’s length, the business interests transfer to its beneficiaries. Business trusts are treated as corporations and may conduct business transactions just like individuals.

Types of Business Trusts

Just as there are several different types of individual trusts, there are three main categories of business trusts. Here’s a breakdown of each:

Grantor Trust

The first type is called a grantor trust. Grantor trusts consist of a grantor, a trustee and a beneficiary. This type of trust is very self-contained. The grantor pays taxes on the income that comes from the trust and has complete control over it. This includes control over business distributions to the beneficiaries.

Simple Trust

Next is a simple trust. For a trust to fall into this category, its status must be verified by the IRS. With a simple trust, the trustee must distribute business profits directly to the beneficiaries. It’s also prohibited from doing things like touching any principal assets.

Complex Trust

A complex trust is in some ways the opposite of a simple trust, though it still isn’t managed by the beneficiaries of the trust. Business profits and other funds may be distributed only in part to beneficiaries and may even be contributed to other organizations, such as charities. In order to maintain status as a complex trust, the trust needs to have at least some form of income.

Pros and Cons of Business Trusts

There are several benefits and downsides to opening and using a business trust. The most prominent perk has to do with liability. Similar to an LLC or corporation, business trusts are created so that the beneficiaries of the trust can reap the benefits of owning and often running the business, while being protected from individual liability. Business trusts are also beneficial because they provide an added layer of privacy and it’s easy to set distribution terms for beneficiaries.

On the flip side, business trusts can be expensive and difficult to maintain. You’ll want to work with a lawyer to open a trust, but you’ll probably want to retain their services throughout the life of the trust to ensure it continues to operate the way you want it to. This process isn’t always easy, as business trusts can face a variety of obstacles when it comes to legal compliance. Additionally, business trusts typically can’t have lifetimes of longer than 99 years, so multi-generational arrangements may not be an option.

How to Set Up a Business Trust

If you’re interested in setting up a business trust, the first step is to talk to an attorney that can help. As we state above, you’ll likely need to work with an attorney throughout the life of your business trust. Note that trust lawyers typically charge around $500 per hour and the outright cost to set up a business trust could be more than $5,000.

Once the trust is up and operating, the hardest part is officially out of the way. While you may need to amend the trust down the road, you’ll have to detail some of the most important terms, such as the distribution schedules, trustees and beneficiaries.

Bottom Line

A business trust is often difficult to set up, and it’s not a necessary part of every business out there. Your business arrangement may be good as it is, or you may be better suited to use a limited liability corporation (LLC), a partnership or another type of structure. Before you pull the trigger on creating a business trust, it’s important to figure out the key elements surrounding it.

Tips for Business Planning

  • Deciding how to structure your business isn’t always an easy task. It can help to have a financial advisor in your corner, guiding you through some of the toughest decisions. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors, get started now.
  • When deciding on a business plan, it’s important to cover all the necessary details, from future income projections to leadership hierarchies. Check out SmartAsset’s guide to writing a financial plan for a business.

Photo credit: ©iStock.com/ljubaphoto, ©iStock.com/Yagi-Studio, ©iStock.com/seb-ra

Sam Lipscomb, CEPF® Sam Lipscomb is a writer for SmartAsset. His work spans a wide variety of personal finance topics with expertise including retirement, investing and savings. He is particularly well versed in credit cards. Sam has been featured in The Economist and on The Points Guy. He is a Certified Educator in Personal Finance (CEPF®). Sam graduated from Kenyon College with a degree in Economics and enjoys being a go-to resource for family and friends when it comes to personal finance. Originally from Washington, DC, Sam loves all things aviation and is a Cleveland sports fan. He currently lives in New York.

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Source: smartasset.com

Estate vs. Trust: What’s the Difference?

Estate vs. Trust: What’s the Difference? – SmartAsset Close thin Facebook Twitter Google plus Linked in Reddit Email

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Trusts and estates are the two main legal structures for transferring assets to your heirs and beneficiaries. Each works in critically different ways. Estates make a one-time transfer of your assets after death. Trusts, meanwhile, allow you to create an ongoing transfer of assets both before and after death. Here’s how each one works. Consider working with a financial advisor as you weigh the relative merits of trusts and estates.

What Is an Estate?

An estate is everything that you own when you die. This does not include anything held jointly with someone else. Nor does it include anything that you have transferred or otherwise assigned by the time you die. Your heirs include anyone who receives money, belongings or other assets from the estate.

So, for example, say Steve dies. The house that Steve and his wife owned together doesn’t become part of his estate, as it now belongs solely to his wife. Nor would anything that Steve gave away as his death was approaching. Instead, Steve’s estate would include anything that Steve independently owned at the time of his death.

An estate is temporary. It exists to make a one-time distribution of the assets of the deceased. Once those assets have been disposed of, the estate no longer exists. This does not mean, however, that an estate is necessarily short-lived. Some estates can last for years, if that’s how long it takes to make a final distribution of all assets.

An estate can be distributed in two main ways: by will or by legal chain of inheritance.

A will is a series of instructions for who should get the assets of an estate and how those assets should be distributed. If the decedent (a legal term for person who died) has a valid will at the time of death, the estate is distributed under those terms.

When someone dies without a will, this is known as dying intestate. In this case their assets will be distributed according to state law. Most of the time this means that the decedent’s assets go directly to their next of kin. In most states, spouses claim priority in this line of inheritance, followed by children, then parents and then extended family.

One of the most common misunderstandings regarding an estate is how much control someone has over the terms of his or her will. While state law governs who inherits when someone dies intestate, most states have very few restrictions on how someone can distribute assets through a will. When you die, you are mostly free to leave your belongings to whoever you choose.

Before anyone can inherit, however, an estate has to resolve three main obligations:

When someone dies, creditors and bill collectors have first claim on the assets of the estate. The estate pays all debts owed by the dead person before anyone else can inherit. This can involve selling off property, if the deceased didn’t have enough cash to pay bills. If those bills are larger than the estate itself, the heirs receive nothing.

In addition, when someone is wealthy enough, the person’s estate can trigger dedicated estate taxes.

Estate taxes are assessed based on how much an heir has received, and they require a high level of wealth. In general, for an individual, estate taxes do not apply unless you have inherited more than $11.18 million ($22.36 million for a couple filing jointly). This includes not only cash but also the value of any property or other assets. (For example, if you inherit land worth $30 million you will owe estate taxes on that inheritance.)

If estate taxes apply, they are paid out of the estate itself.

Finally, some estates require oversight and management. Any related costs and fees are drawn directly from the estate itself.

An estate can trigger any number of different potential costs. For example if the terms of a will are overseen by a lawyer, that attorney will bill his or her legal fees directly to the estate. If an estate requires management, someone may be named its executor. This is someone whose job it is to distribute assets according to the will’s instructions, pay any bills, and otherwise manage the distribution of assets. Depending on the workload, the executor may bill the estate for his or her time. Or, if an estate is large or complex enough, a probate court judge may oversee the distribution of assets. Court costs and fees are drawn from the estate.

In other words, any costs related to the management of the estate are paid by the estate itself.

What Is a Trust?

A trust is a legal entity which holds and distributes assets according to certain conditions. The person who creates the trust, who is known as the “grantor,” can establish those conditions largely at will. A trust exists independently of the people who created it and receive funds from it. Any assets belong to the trust itself until they are distributed. To create a trust, you have three basic steps.

  • First, as the grantor you create a pool of assets.
  • Second, you hand those assets over to a third party to manage and oversee. This third party is known as the “trustee(s).”
  • Third, you identify the people who can receive the trust’s assets based on certain terms and conditions. These people are known as the “beneficiaries.”

For example, say that Steve is a wealthy man and wants to ensure an education for the next generation of his family. He might set up a trust along the following lines:

  • As the grantor, Steve would place $5 million in an account.
  • The account would be overseen by Steve’s lawyer, who would act as the trustee.
  • Any child, niece and nephew of Steve’s are named as the beneficiaries. They can draw on the account to pay tuition for any college or university.

Under this trust Steve’s family members can now draw upon the money to pay college tuition, but nothing else. He hasn’t simply given them a pot of money. The gift has conditions. Steve’s lawyer, as the trustee, has the job of making sure the beneficiaries meet those conditions. For example, it will be her job to make sure that Steve’s family members have applied to actual colleges and aren’t just scamming the trust.

Steve’s lawyer, as the trustee, is also responsible for financially managing the trust. She will oversee its investments, banking and other administrative matters.

Like an estate, a trust draws its costs from itself. The trustee, in our example Steve’s lawyer, will bill the costs of her time to the trust itself. If she needs to hire any accountants, investigators or any other related services, she would bill those costs to the trust itself as well.

Unlike an estate, you can set up a trust even while you’re still alive. If Steve had written that $5 million grant into his will, none of his family members would get the tuition money until after his death. By creating a trust he ensures that they can receive the money even while he is still alive. This is called a living trust.

However, like an estate, a trust survives its creator’s death. When someone does this the trust does not become part of their estate. Instead the trust is a legal entity on its own. When the grantor dies, the trust continues on until it either runs out of assets or its terms dictate otherwise. (For example, a trust might say “after 50 years dissolve the trust and distribute any remaining assets among living beneficiaries.”)

Living trusts are common ways for families to pass down land, heirlooms and other significant assets. It allows property to belong to the family in general, even if it is held and used by any one individual at a time. Living trusts also mean that assets can avoid probate court and even estate taxes depending on how the trust has been established.

Most trusts are what is known as a revocable trust. This means that the grantor can still control, change and even rescind the trust at will. Ultimately the person still owns the assets, the trust just manages those assets for him or her.

An irrevocable trust is the opposite. Under this setup the grantor cannot control, change or rescind the terms of the trust. Once it is created the trust belongs to its beneficiaries, even though they must still meet its terms or conditions.

While trusts and estates both exist to distribute assets, they do so in very different manners. A trust can be created while the grantor is alive, while an estate is created at the moment of someone’s death. A trust is intended to be a semi-permanent entity. It exists to distribute assets over time according to a series of rules and conditions, overseen by a trustee. An estate is intended to be temporary. It exists to make a one-time distribution of assets, after which it will no longer exist.

An estate exists whether you plan for one or not. However, you can structure your estate by writing a will, which dictates who gets your assets and how. A trust has to be specifically created. Once a trust has been created it, too, dictates who gets your assets and how.

The Bottom Line

Trusts and estates are the two most common mechanisms for passing down assets. An estate is everything that you own at the moment of your death, and is passed in a one-time distribution to your legal heirs. An estate is a legal entity that can exist for generations, and distributes assets according to a series of rules and instructions.

Estate Planning Tips

  • A free, easy-to-use retirement calculator can give you a good estimate of how you are doing in reaching your financial goals.
  • To build a trust you need a well-managed set of assets to begin with. Building a portfolio of such assets is best done in partnership with a financial advisor. Finding one doesn’t have to be hard. SmartAsset’s matching tool can connect you in minutes with a financial planner, the kind who can help you build a portfolio worth passing on to your heirs. If you’re ready, get started now.

Photo credit: ©iStock.com/kWaiGon, ©iStock.com/Andrii Dodonov, ©iStock.com/FatCamera

Eric Reed Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.

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Source: smartasset.com