A trust is similar to a will. It’s an elegant way of specifying how your property gets distributed upon your death. Property placed in a trust can pass to your designated beneficiaries without the delays and expense of going to probate court.
But – a big but – a living trust is not a complete substitute for a will. You won’t be able to name a guardian for a minor child, for example. For many people a trust is a more efficient way to transfer property at death, especially large-ticket items such as a house. Here are a few benefits of placing your property in a trust:
- You can avoid probate. This allows you to bypass probate and to pass the property directly to your designated beneficiaries. This is especially important if you own real property in multiple states.
- A trust can help with property management for those who can’t or do not want to manage for themselves. (This is particularly beneficial for older individuals who want to make sure they will be cared for without the need for guardianship or conservatorship.)
- Trusts can reduce estate and gift taxes.
- A trust protects assets from creditors and lawsuits better than does a will.
- If you want to protect family wealth for future generations, you can set up a trust to protect these assets (whether a business or other accumulated assets). You can also save estate taxes (if this is relevant). A trust can also protect these assets from irresponsible heirs over several generations.
There are a variety of types of trusts. They are both flexible and complex. One of the most common types of trusts is called an AB trust, also called a bypass trust. An AB trust helps provide significant estate-tax savings as well as preserve assets to survive the blending of families when and if spouses get remarried. You need three things to create a trust for your estate:
- The creator, also called settlor or grantor
- Trust property
You don’t need to name someone to manage your trust (though this is certainly a good idea). The court can always choose someone to administer the trust. You can have a trust as long as you have someone who created the trust, you have property in the trust and some identifiable beneficiaries.
Think of a trust as a special place where ordinary property from your estate goes, as the result of some type of transformation that occurs, that takes on a new identity with immunity from estate taxes and resistance to probate. In this article, I primarily discussed “living trusts” or revocable trusts. You can read more about this type of legal instrument here.
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