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.

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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 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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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.

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


What Is a Business Trust and How Does It Work?

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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.

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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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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.

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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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Trustee vs. Executor: What’s the Difference?

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

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Estate planning can be difficult. In addition to the fact that it may bring up some uncomfortable feelings – like grappling with one’s mortality – there is also the fact that it can be a complex legal process. There are ways to make estate planning easier, though, such as trusts. If you form a trust, there are a few terms you’ll need to know: trustee and executor. These terms are sometimes used interchangeably, but they actually have distinct roles. A trustee manages a trust and the assets inside, while an executor is responsible for fulfilling the deceased’s wishes and distributing property and assets as proscribed. For help with trusts or other estate planning items, consider working with a financial advisor.

What Is a Trustee?

A trustee is the person who manages the assets in a trust. This is different from the trustor, who’s the person who creates the trust. When it comes to estate planning, the trustee normally plays their most important role after the trustor passes away.

Trustees are especially important when the assets in the trust are being held for a minor who’s set to receive the assets inside the trust once they reach a specific age. For instance, let’s say someone forms a trust full of investments they want passed on to their children, who are teenagers. If that person dies before their children turn 18, the named trustee will manage the assets in the trust for those minor children.

The trustee has a legal responsibility to act in the best interest of the eventual beneficiaries of the assets in the trust. This means making the smartest investments, not taking unnecessary risks and doing anything else that will lead to the best results for them.

What Is an Executor?

An executor, on the other hand, is the person who makes sure that a recently deceased person’s wishes – as expressed in a will – are carried out. They make sure that the correct assets are passed on to the right family and friends. This can include following through on any charitable donations the decedent wanted to be made with the money they left behind and defending the will against any challenges.

The executor also has legal responsibilities, such as making sure that the estate’s probate paperwork is filed. They also must oversee the probate process in the name of the estate. This could also include making sure the estate tax is dealt with correctly.

While some states have their own estate and inheritance taxes, the premier one is the federal estate tax. For 2021, this only applies to estates worth more than $11.7 million, meaning most estates won’t end up owing anything. Executors will need to know the state laws for the place where the deceased died as well. States have different exemption amounts too.

Finally, the executor has to settle any debts the estate has. This includes credit cards, mortgages and any other loans the person still owed when they died.

Choosing Trustees and Executors

There are many estate planning choices, but picking trustees and an executor are among the most important. For both, you’ll want to pick someone you explicitly trust. A trustee should be someone who’s willing to manage the trust for as long as necessary. In addition, you should trust their ability to make decisions in the best interest of the beneficiaries.

For an executor, the right choice is someone who you know will make sure your wishes are respected. While you’ll likely be leaving a will with detailed instructions, it may even make sense to talk with your executor before you die so they are clear on your wishes. This can help ensure your needs are carried out exactly how you envision them.

Bottom Line

A trustee is the person who manages a trust on behalf of a beneficiary. They are legally obligated to always manage the assets in the best interest of said beneficiary. An executor, on the other hand, is responsible for carrying out the wishes of a recently deceased person. This includes distributing assets and fulfilling any debts incurred while the person was alive.

Both executors and trustees are equally important to the entities that they represent. They are each also central parts to many people’s estate plans, which is one of the last marks you’ll leave on your family. In turn, make sure your selection process for them is as complete as possible.

Estate Planning Tips

  • A financial advisor can help you make all the right choices when it comes to estate planning, and finding one doesn’t have to be hard. SmartAsset’s free tool connects you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors, get started now.
  • Another person you’ll need to name is a guardian. This is who will take custody of any minor children you have if you and your spouse die. Though this isn’t pleasant to think about, if you take care of it now it can save everyone a big headache later.

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Ben Geier, CEPF® Ben Geier is an experienced financial writer currently serving as a retirement and investing expert at SmartAsset. His work has appeared on Fortune, and CNNMoney. Ben is a graduate of Northwestern University and a part-time student at the City University of New York Graduate Center. He is a member of the Society for Advancing Business Editing and Writing and a Certified Educator in Personal Finance (CEPF®). When he isn’t helping people understand their finances, Ben likes watching hockey, listening to music and experimenting in the kitchen. Originally from Alexandria, VA, he now lives in Brooklyn with his wife.

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How Does a Credit Shelter Trust Work?

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A credit shelter trust is used to help married couples with significant assets pass their estates after their deaths to children or other beneficiaries without incurring estate taxes. Credit shelter trusts are also useful for avoiding probate, shielding assets from creditors and ensuring the wishes of a deceased spouse are carried out. While they are mostly useful for large estates, couples with sizable financial assets can get important benefits from using credit shelter trusts as part of overall estate plans. Consider working with a financial advisor as you create or update your estate plan.

Estate Tax Background

The primary purpose of a credit shelter trust is to reduce federal estate taxes levied on assets transferred to heirs. Death or wealth transfer taxes, as they’re also known, have been around in various forms since the early days of America. They’ve existed in their current form since 1916.

Estate taxes can be significant. The top rate, which is levied on amounts more than $1 million over the exemption amount, is 40%. The exemption amount is indexed to inflation and for 2021, it’s $11.7 million for individuals or $23.4 million for couples. Since few estates are that large, not many Americans actually pay any federal estate tax, sometimes derisively referred to as the death tax. However, for married couples who have enough assets, credit shelter trusts can be real money savers.

The estate tax exemption is currently slated to expire in 2025. While it may be renewed by Congress, it’s likely that it will be different. Estate tax law changes frequently at both the federal and state level, so it’s important to stay current on legislation in order to plan effectively.

How Credit Shelter Trusts Work

A credit shelter trust, also known as a bypass trust, B trust, exemption trust or family trust, is an irrevocable trust. Like all trusts it consists of a contract between a trustor and a trustee. The trustor is the person who sets up the trust and provides the assets. The trustee is the person charged with overseeing the trust and making sure the terms of the trust are followed. The trust contract lays out all the assets that will be included in the trust. These can be any form of property, including cash, stocks, bonds, real estate and collectibles. The trust documents also describe how these assets will be distributed to the beneficiaries. For instance, a trust may specify that assets won’t be distributed to a beneficiary until he or she reaches a certain age.

A credit shelter trust is created after one partner in a marriage dies. Any assets that are put into the trust are considered separate from the estate of the spouse who is still alive. This allows them to go to the beneficiaries after the surviving spouse’s death without incurring any tax. While the surviving spouse is still alive, he or she can receive income from the assets held in the trust.

Credit Shelter Trust Benefits

A credit shelter trust works as a tax management tool because assets transferred to a surviving spouse are exempt from federal estate taxes. There’s no limit on this amount. After the second spouse dies, taxes would normally be levied on any assets from that spouse’s estate that are passed on to beneficiaries. However, assets placed in a credit shelter trust are not considered part of the surviving spouse’s estate. As a result, they are eligible to pass on to beneficiaries without being taxed after the second spouse dies. Any appreciation in value in the trust assets can also be bequeathed without taxes.

As an example of how this works, consider a married couple with a $15 million estate. Without estate planning, on the death of the second-to-die spouse, the estate would be $3.3 million over the 2021 $11.7 million federal estate tax exemption. At the top tax rate of 40%, the estate would pay $1.32 million on the $3.3 million excess. In addition, there is a base tax of $70,800 charged on the first $11.7 million. Total estate tax would come to $1,390,800. A credit shelter trust would avoid all this tax.

In addition to reducing taxes, a credit shelter trust can help ensure that the surviving spouse honors the wishes of the deceased spouse. The trustee will make sure that terms of the credit shelter trust are followed. For instance, if the first-to-to-die spouse wants part of his or her estate to go to children of a previous marriage, the trust document can specify that. Trust assets are also protected from creditors. And assets placed in the trust don’t have to go through probate.

Credit Shelter Trust Limits

Credit shelter trusts are most useful when each spouse has enough assets to reach the amount of the estate tax exemption. They are not generally used when estates are less than the amount of the exemption.

A credit shelter trust is an irrevocable trust, meaning the terms of the trust cannot be altered. That means the needs of the surviving spouse have to be carefully considered when setting up the trust, since the surviving spouse has limited control over assets in the trust.

Credit shelter trusts also have to file federal income tax returns. This can be time-consuming and costly and has to be provided for in the trust documents.

Bottom Line

A credit shelter trust is one of several different types of trusts, and can be effective tax management tools for estates large enough to trigger the federal estate tax. They can also be helpful for making sure surviving spouses follow a deceased spouse’s instruction for the disposition of assets. Credit shelter trusts can keep assets from going through the time-consuming and costly probate process. And they can shield a married couple’s assets from creditors after one spouse dies.

Tips on Estate Planning

  • Credit shelter trusts are just one tool that can be used for estate planning. Working with an experienced and qualified financial advisor can help make sure your estate is distributed according to your wishes, including minimizing estate taxes. SmartAsset’s free financial advisor matching tool can connect you with up to three local advisors. Get started now.
  • A free, easy-to-use retirement calculator can give you a good estimate of how you are doing in reaching your financial goals.

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Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.

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How a Medicaid Trust Protects Your Assets

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A Medicaid asset protection trust (MAPT) can be useful for estate planning if you believe you or your spouse will need long-term care at some point. Transferring assets to this type of trust can allow you to qualify for Medicaid to pay for long-term care while preserving your savings. If you don’t have a long-term care insurance policy in place, you may consider adding a Medicaid trust to your estate plan. Understanding how this type of trust works can help you decide if it’s right for you. Work with a financial advisor to create a comprehensive estate plan that provides for a special-needs spouse after you die.

Medicaid Asset Protection Trust, Explained

Medicaid trusts serve one very specific purpose: protecting your assets if you or your spouse requires long-term care. These trusts are designed to fill a gap that may exist if you don’t have long-term care insurance and you want to avoid draining your assets to pay for nursing home care.

While Medicare covers a number of healthcare expenses for seniors aged 65 and older, long-term care in a nursing home is not one of them. Medicaid, on the other hand, does pay for long-term care but there’s a catch. You must be financially eligible to qualify for Medicaid.

Each state is responsible for administering its Medicaid program. But generally, qualification is based on two things:

  • Income, which can include money you earn from working, distributions from retirement plans, Social Security retirement or disability benefits, pension distributions and annuity payments
  • Assets, which can include things like savings accounts, taxable investment accounts, real estate or land

If you’ve worked hard to save and invest and accumulated substantial assets, you may not be able to get Medicaid for long-term care. Or at least, you won’t be able to qualify without first spending down some of those assets. A Medicaid asset protection trust allows you to avoid that scenario.

How a Medicaid Trust Works

A Medicaid trust is a type of irrevocable trust. That means once you create the trust and transfer assets into it, you can’t take those assets back out again. The types of assets you may choose to transfer to a Medicaid asset protection trust can include:

  • Qualified retirement accounts, including a 401(k) or IRA
  • Vehicles
  • Personal assets, including jewelry, heirlooms and other valuables
  • Certain life insurance policies

You could also transfer a home to a Medicaid trust if it’s your primary residence or your spouse’s primary residence. This type of transfer can be tricky, depending on what the home is worth and how much equity you’ve accrued, so you may want to talk to an estate planning or Medicaid planning attorney first.

Some assets may not affect your Medicaid eligibility if they’re below the limits specified for your state. For example, bank accounts, CDs, money market accounts and taxable investment accounts may not factor in if the total combined balance is under a certain amount. You’d need to check the limits on countable assets in your state to determine whether you’re over or under the allowed threshold.

Benefits of Establishing a Medicaid Trust

A Medicaid asset protection trust is similar to other trusts, in that a trustee is named to manage trust assets. The trust can also have one or more beneficiaries. The beneficiaries would be able to receive assets in the trust or benefit from the income they generate. Transferring eligible assets to a Medicaid trust allows you to avoid the spend-down requirement to qualify for coverage. If you have too many assets to qualify for Medicaid based on your state’s guidelines, you’d be required to use some of them to cover long-term care or other medical expenses to become Medicaid-eligible.

This is problematic for two reasons. First, it shrinks the size of the estate you have to pass on to a surviving spouse, adult children or other beneficiaries. And second, selling off certain assets could have tax implications if you’re required to pay capital gains on the sale. A Medicaid trust allows you to avoid both of those scenarios.

There’s also another benefit if your state actively enforces Medicaid estate recovery. This practice allows states that pay long-term care costs through Medicaid to try and get some of that money back from the recipient’s estate once they pass away. There are some exclusions allowed. For instance, states may not try to recover assets from a disabled surviving spouse or minor children. But having a Medicaid trust in place can ensure that you don’t have to worry about estate recovery being an issue.

Special Considerations for Medicaid Trusts

While Medicaid asset protection trusts can be helpful in estate planning, there are a few things to keep in mind. One of the most important is the look-back period.

The Medicaid look-back period is a period of time in which any transfer of assets to a Medicaid trust would still be included in eligibility considerations. In most cases, this look-back period extends five years back from the time you or your spouse entered a nursing home. So if you’re interested in using a Medicaid trust to protect assets then you may want to create one sooner rather than later to avoid look-back period complications.

The next thing to keep in mind is that once assets go into a Medicaid trust, that transfer is permanent and irrevocable. So you need to be fairly certain that establishing a Medicaid trust makes sense for you and that you’re comfortable with the permanent transfer of assets.

Finally, it’s important to consider the cost of creating and maintaining a Medicaid trust. Establishing a trust can be more expensive and time-consuming than drafting a will or a living will. If you don’t have a lot of assets, say less than $100,000, then creating a Medicaid trust may not make sense. Talking to a financial advisor or estate planning attorney can help you decide if this is the best way to protect your assets.

The Bottom Line

Medicaid trusts can help you keep more of your wealth in the family to pass on for future generations, should you or your spouse need long-term care. Considering the expense involved with nursing home care, it may be worth looking into the benefits of a Medicaid asset protection trust. However, it’s also helpful to weigh how likely you or your spouse may be to need long-term care as you age.

Tips for Estate Planning

  • Consider talking to a financial advisor about long-term care and what that might mean for Medicaid planning If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. You can get your personalized advisor recommendations in minutes just by answering a few simple questions. If you’re ready, get started now.
  • Purchasing a long-term care insurance policy can be another solution when planning how to pay for nursing home care. This type of insurance policy can pay out benefits to cover long-term care. Some long-term care policies also include a life insurance component. This affords double protection since if you don’t need the long-term care coverage your loved ones could receive a death benefit when you pass away. Long-term care coverage tends to be cheaper the younger and healthier you are when you purchase it, which is something to keep in mind as you shop around for policies.

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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.

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FreeWill Review: Pros & Cons

FreeWill Review: Pros & Cons – SmartAsset

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FreeWill is an online estate planning tool that allows you to create or update a legally binding will in as little as 20 minutes. It offers products such as the ability to document funeral wishes, create a durable financial power of attorney, advance healthcare directives (living wills) and give charitable contributions from your retirement or stock brokerage account. As the company’s name implies, FreeWill’s services are completely free. Funding comes from FreeWill’s partnership with more than 100 nonprofit organizations who sponsor these services. You can access the service online, giving users the ability to change or download their will at any time without needing to create a new one.

If you’d rather have a professional personally help you with your entire estate plan, consider working with a local financial advisor.

FreeWill Overview
  • Fairly robust service for free
  • Online access – Once you create you can update at any time
  • No live support
  • Relatively smaller range of products
Best For
  • Cost (free)
  • Charitable giving

FreeWill: Services & Features

For a completely no-cost service, FreeWill’s offerings are fairly robust.

First, it can cover an individual’s most important needs for a last will and testament. The website offers a questionnaire via an easy-to-use interface, asking basic information as well as other pertinent details such as current income, family information and whether users have any children or pets that they’d like to cover in their will.

For users who need to create an advance healthcare directive (also known as a living will), filling out the form will involve answering questions about some personal information, selecting a preferred physician and hospital for end-of-life care as well as selecting an agent or healthcare proxy. Then users can share what they need to about the values they wish to be upheld and other specific instructions, before finalizing with signatures and any further instructions specific to their state.

For a durable financial power of attorney, individuals will need to provide some personal information and also select an agent or agents to make financial decisions for them if they become unable to do so. Then users can choose the powers that any agent(s) will be allowed to exercise, list any specific limitations and provide other important details (i.e. compensation, monitors, guardians, revocation and how documents will be executed).

Additionally, in keeping with its commitment to charitable giving, FreeWill offers individuals ways to give a charitable contribution from a retirement account or a stock brokerage account.

FreeWill: Pricing

FreeWill’s Fee Structure
Membership Tiers
  • $0 / Free for individuals
Extra Features

FreeWill’s pricing model is straightforward, as it is free to use for individuals. As an individual user, you can draft your will, durable financial power of attorney or advanced healthcare directive via the website.

Funding comes from FreeWill’s partnership with more than 100 nonprofit organizations who sponsor these services. Nonprofit organizations can learn more about a range of tools that FreeWill offers – like a Bequest Tool, a Qualified Charitable Distributions (QCD Tool) and a Stock Gifts Tool – in order to make gifts easier for both supporters to give and organizations to receive.

FreeWill: User Support

FreeWill’s website offers a streamlined design that’s fairly easy to use. For a last will and testament, its questionnaire form is divided into parts and users can track their progress so that they know how many sections remain to fill out. For services such as advance healthcare directives and durable financial power of attorney, the site outlines the form sections and the information you’ll need to gather before you begin.

If you’re looking for immediate support from customer support representatives, FreeWill unfortunately does not provide this kind of a feature. It does, however, have a contact page as well as a help center page where users can find the answers to some frequently asked questions addressing troubleshooting and technical issues.

Thanks to insight from experts around the country, FreeWill makes sure that a user’s will complies with each state’s specific legal requirements. Of course, FreeWill makes it clear that it is not a law firm and therefore cannot provide legal advice. If you need to enlist the services of a professional attorney or even a professional financial advisor, you should do so separately.

FreeWill: Online Experience

FreeWill does not have any further mobile or online platforms available through its service, as all the final documents will be available to users once they finalize the questionnaire process on the site. There is no app or other software that a user would need to download. Given the company’s no-cost pricing model, this is probably to be expected.

How Does FreeWill Stack Up?

Comparing FreeWill to Other Services
Service Pricing Features Accessibility
  • $0 / Free for individuals
  • Last will & testament, durable financial power of attorney, advance healthcare directive, charitable contributions
  • No legal services or support
  • $14.95 – $19.95 for legal documents
  • TotalLegal Plan subscription $89/year or $9.95/month
  • Create documents
  • With subscription: Legal services from attorneys
  • With subscription: Document storage vault service
Tomorrow app
  • Mobile app free for families
  • Free for employees covered by employers who buy Tomorrow Plus plans
  • $39.99/year for Tomorrow Plus plan not through employer
  • Mobile creation of estate planning documents, such as will, trust, healthcare directive, power of attorney
  • App allows users to connect with family members and make decisions together
  • No legal services or support
  • Mobile app

The biggest differences FreeWill has over competitors is its emphasis on charitable giving and its free services as a result of that.

Bottom Line

Overall, FreeWill is an easy-to-use website that helps those who are looking to have an official last will and testament the ability to create a simple one using their online forms. The service – including certain other end-of-life planning forms such as a durable financial power of attorney or a living will – is free to use for individuals, with an emphasis on charitable giving driving the company’s ethos and business model. While 24-hour support or live customer representative or legal support is not available with free will, its website allows users to create an account, begin and have their specific forms in just minutes – and also allows them to log in, update and download forms again at any time.

Estate Planning Tips

  • If you’re seeking more detailed advice instead of or in addition to your own estate planning steps, consider reaching out to a financial professional. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool connects you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors, get started now.
  • Estate planning is all about looking ahead and mapping out your plan as best as possible. If you’re going the DIY route, make sure you’re aware of the possible financial consequences. Read more about the dangers of DIY estate planning and five estate planning mistakes you can’t afford to make.

Photo credit: FreeWill

Nadia Ahmad, CEPF® Nadia Ahmad is a Certified Educator in Personal Finance (CEPF®) and a member of the Society for Advancing Business Editing and Writing (SABEW). Her interest in taxes and grammar makes writing about personal finance a perfect fit! Nadia has spent ten years working as a seasonal income tax assistant, researching federal, state and local tax code and assisting in preparing tax returns. Nadia has a degree in English and American Literature from New York University and has served as an instructor/facilitator for a variety of writing workshops in the NYC area.
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How Much Does a Living Will Cost?

How Much Does a Living Will Cost? – SmartAsset

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Confronting our health and what might happen to us someday is not an easy task. Even though estate planning is emotionally challenging, it’s a necessary step to protect yourself. Not only that, without any plans, your loved ones might face unnecessary difficulties. Dealing with the assets alone can be a struggle. You wouldn’t want them worrying about making medical decisions on top of that. So, if you want to prepare for the future, it might be the right time to ask, “How much does a living will cost?”

One of the best resources for estate planning, especially end-of-life planning, is a financial advisor.

What is a Living Will?

A living will refers to a legal document that records your medical, long-term and end-of-life care choices. However, it only comes into play when you can no longer communicate your decisions to your doctors or loved ones.

Unfortunately, there are a variety of scenarios that may require a living will. For example, if you have a degenerative disease or sustain major brain trauma, you likely won’t be able to advocate for yourself. To prepare for that, individuals make a living will while still healthy and sound of mind. Some frequently mentioned directions people put in this document include ventilators, medication and resuscitation.

Factors that Impact Living Will Costs

Your estate attorney will take special care to customize your living will to fit your needs. Those specifications, however, and your circumstances can shift the price needed to make the document. Some of the factors that influence the overall cost include:

  • Location – Attorneys that work in urban areas tend to cost more than those based in suburban or urban spaces.
  • Professional Experience – Lawyers and law firms that specialize in estate planning will cost more.
  • Directive Complexity – The larger and more complicated your living will, the more expensive it will be to complete.

How Much Does a Living Will Cost?

When researching which estate planning attorney to work with, you should know the basic payment system they will use. If you know ahead of time, you can prepare accordingly. Lawyers tend to use either one of two ways: flat fees or hourly billing. However, you also have the option of do-it-yourself (DIY) living wills.

DIY Living Wills

You might be considering ways to avoid any high, professional costs in the first place. If so, a DIY living will is a cost-effective method. You can search online or visit certain stores to get a basic, pre-made form. The only actual cost, then, would be the notarizing price, which you can expect to be only around $10 to $15. That is unless you want a more complicated pre-made form or will-making software. In that case, certain websites might begin to charge you, although it will still be a low cost compared to professional help. The software typically runs from $20 to $100.

However, you should also know that writing your own legal documents comes with its complications and some risks. Your state likely has rules regarding the document’s legitimacy that you may not know. Any mistakes you make hoping to save money may end up costing you more in the long run. Also, a basic will drafted by an attorney is comparable in price to the cost of higher-end software. So, you may be financially safer to choose professional guidance.

Flat-Fee Living Wills

Once you start working with an attorney, you’ll find that they typically have one of two payment structures. A flat flee works like how it sounds. Once you decide to work with an estate planner, they will ask for one “flat” payment. The cost of that payment will depend on the factors mentioned above: location, attorney experience and and the number and type of documents needed. You can expect a low range of $300, with the higher prices easily exceeding $1,000.

However, a flat fee can be beneficial despite how shocking that price tag might be. It demands less work on your attorney’s part since they won’t have to keep track of hours and can just focus on the living will’s assembly. Also, you get to relax once the process has started, knowing you’ve done your part.

Hourly Payment Structure Living Wills

An alternative to the flat fee is hourly billing. This format will also heavily depend on the circumstances. Again, lawyers in high-traffic areas will likely charge more. So, if you’re in the city, you’ll probably find hourly rates above $300. Outside that area, it’ll drop to around $150 an hour.

Remember, a firm or lawyer’s experience and your living will’s specializations may also drive up those prices.

Benefits of Hiring an Attorney

While the online world is a convenient one, it may not provide for all your needs. DIY legal documents often cost less than working with a professional, but that’s because they’re not customized. The form comes as is ,and you simply fill it out to the best of your abilities.

Furthermore, the benefit of working with a person is exactly that. You can have a dialogue with your estate planning attorney, which is more direct than typing questions into a search engine. You can ask your attorney any concerns you may have about a living will or other legal documents. Also, the document they may for you will cater to your needs.

The Takeaway

Living wills are an important step for any individual looking into end-of-life medical and financial planning. The more vulnerable you are, the more essential they become too. If you think you might need to include a living will in your future, shop around for your best options to make one. If you have straightforward wishes, a DIY living will might be enough for you. In contrast, it may be worth speaking to a professional estate planning attorney if there are several complications. Either way, as long as you have a legal living will, you can be sure you and your family are cared for.

Estate Planning Tips

  • A key part of estate planning is figuring out how much you will have to live on. That’s where a free, easy-to-use retirement calculator can be invaluable.
  • Consider working with a financial advisor as you do estate planning. The great thing is that finding a financial advisor doesn’t have to be difficult. Using SmartAsset’s financial advisor matching tool, you can connect with professionals in your area. It only takes minutes for you to have the expert help you need, so get started today.

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Ashley Chorpenning Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
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