What Is a Trust?
A Trust is a legal arrangement that transfers ownership of your assets into a Trust account and sets forth detailed instructions for how and when your assets are to be distributed, which can be during your life, after your death, or both. A Trust is set up by a trustor and managed by a trustee. The trustee has a fiduciary duty to act in the best interests of the beneficiaries of the Trust and distribute assets of the trust according to the directions of the trustor, as laid out in the Trust document.
Unlike a Will, a Trust is effective as soon as it is signed and funded with the trustor’s assets. A trustor may label themselves as the trustee to maintain control of the assets during life or may designate a third-party trustee, which can be an individual or a bank to serve as trustee.
In the event a trustor serves as trustee, it is imperative the trustor assign a successor trustee who will carry out the terms outlined in the Trust, in the event the trustor becomes unable to serve as trustee.
What Are the Elements of a Trust Document?
Your Trust agreement is the legal document that allows you to transfer ownership of your assets and includes the following:
- Trustor – The individual setting up the Trust.
- Trustee – The person you assign to manage the Trust. The trustor could name themselves as the trustee and appoint a successor trustee who handles the Trust after the trustor’s death.
- Beneficiary(ies) – The individuals you want to leave your assets with after death.
- Assets – Within your agreement will be a list of the assets you wish to put into the Trust and the beneficiaries assigned to each asset.
- Instructions – Specific details for how and when your assets will be distributed to your beneficiaries
What Are the Benefits of a Trust?
A trust is a good tool not only for estate planning, but for financial planning in general. Setting up a Trust for your heirs ensures their financial stability and future success.
Additionally, despite the common misconception, it’s not just for the super-wealthy. Everyone has the right to determine how their assets will be managed after their death, no matter how large or small.
Additional benefits for setting up a trust include:
- Maintaining Control – Trusts allow you to detail exactly who receives specific assets and when — for example, you could set up a Trust for your grandchildren’s college tuition that will be disbursed once they turn a certain age. Additionally, since you already transferred ownership of your assets into your Trust, the court has no control of the distribution process, and it can’t be contested.
- Avoiding Probate – As stated, even a Will must be verified by the court during the probate process to transfer ownership. When you establish a Trust, ownership is already established, and the assets in the Trust are no longer in your name. This effectively skips the probate process — saving your family time, money, and unnecessary stress.
- Privacy – The probate process is public and requires a court to review all your assets to establish a new owner outlined in your Will — that is if you have one. You might not want to publicize who will inherit what assets since this could create family disputes.
Types of Trusts in Charlotte
There are several types of Trusts that all have unique capabilities and limitations. Choosing the right one for your goals is crucial to an effective estate plan.
The following types of Trusts include:
This is a type of living Trust where the trustor can change different aspects of the Trust at any point in their lifetime, which includes revoking the Trust altogether. Additionally, the trustor can add or remove assets or change how and when beneficiaries receive assets, among other actions.
The trustor often labels themselves as the trustee to maintain control of the Trust, although they are not legally the owner. Once the trustor dies, the Trust becomes irrevocable, and the successor trustee manages the Trust per the trustor’s terms.
Unlike a revocable trust, an irrevocable trust prevents the trustor from removing assets once they are transferred into the Trust. However, the trustor can keep assets out of probate and outline how and when they will be distributed. When assets are placed into an irrevocable trust during the trustor’s life, those assets are excluded from the trustor’s estate for estate tax purposes.
While a living trust is effective during the trustor’s lifetime, a testamentary trust is used in tandem with a Last Will and Testament and takes effect after the trustor’s death.
These trusts are very useful for individuals with minor children because it allows parents to establish a trustee for minors who might inherit a large portion of the trustor’s assets. For example, the trustee might manage a home that a beneficiary inherited until they come of age.
Irrevocable Life Insurance Trusts
An irrevocable life insurance trust is another tool that allows you to maintain control of valuable assets. Under the terms of an ordinary insurance policy, upon your death, a lump sum of money will be distributed to your dependents as part of your life insurance policy.
With your life insurance policy proceeds transferred to a trust, you can control how your funds are distributed. You can provide immediate funds to your spouse or set up a plan to distribute proceeds to children once they reach a certain age.
Another use for an irrevocable life insurance trust is to pay any estate tax that would be owed at the time of your death, so your estate assets do not have to be liquidated and used to pay said tax, or worse strap your family with a massive tax burden. It should be noted that once your terms are set, you cannot make any changes since this is an irrevocable trust.