Trusts are valuable planning tools that can help you and your family achieve a variety of financial and estate planning goals. You may find many practical ways to use a trust for your investments, retirement, children’s education, and your estate. Let’s look at several types of trusts that may be helpful to you:
- Revocable trust. Assets in a revocable trust avoid probate, which is the judicial process that determines the validity of a will and helps ensure that it is faithfully executed. Therefore, your estate saves time and money, and preserves some privacy. Married couples can also use properly structured revocable trusts to help maximize the use of each spouse’s estate tax exemption amount ($1.5 million per person in 2005). Assets can be left for the benefit of a surviving spouse, while still utilizing the first spouse’s exemption amount.
- Life insurance trust. Policies held by a properly drafted trust may not be included in the insured’s taxable estate. This type of trust is a valuable tool for anyone with a sizable insurance policy.
- Qualified residence trust. Putting your home in a trust can help reduce the potential estate or gift taxes on your personal residence.
Beyond estate planning, here are some other situations where the use of a trust may help you achieve your objectives:
Education. A trust can be set up to help fund a child’s or grandchild’s education expenses. Designated trustees will then have discretion to allocate the funds as appropriate to provide incentives for them to pursue their higher education.
Creditor Protection. Many parents have had the unfortunate experience of making large gifts to a married child who subsequently gets divorced and much of those assets go to the former in-law. In other instances, the child may be subject to claims from a lawsuit. A trust can be an excellent vehicle for making gifts to your children in a way that makes the assets available for their use, but prevents them from being depleted to satisfy the claims of potential creditors.
Spendthrift Protection. If a child or relative needs your financial support, but cannot effectively manage assets, a trust can help ensure funds will be available when truly needed. The trust can be structured to distribute assets when the beneficiary reaches a certain age or to allow the beneficiary to become a co-trustee. With the latter approach, the beneficiary may participate in, but not have sole responsibility for, management of trust assets.
Medicaid/SSI “Supplemental Needs.” If your child has disabilities that may qualify for governmental assistance, the receipt of an inheritance or gift normally will disqualify them from benefits until the gift is “spent down” and only exempt resources remain. Assets in a carefully drafted discretionary trust can permit a trustee to expend needed resources for the child’s benefit in a manner that supplements, but does not replace, governmental resource payments.
There are numerous ways to incorporate trusts into your financial and estate plans. For specific guidance, consult your financial, tax, and legal professionals.