Frequently Asked Questions about Trusts
- What are the advantages of having a trust?
- What are the two main categories of Personal Trusts?
- Who are the parties involved in a trust?
- How do these trusts avoid probate?
- What is the cost to create a trust?
- Can a trust reduce estate taxes?
- What is an Irrevocable Life Insurance Trust?
What are the advantages of having a trust?
There are several advantages to having a trust. First, to maintain the ability to control distribution of assets. Second, there may be tax benefits to holding assets in trust. Individuals and businesses consult with their financial professionals and tax advisors to determine if a trust is the right solution for their needs.
What are the two main categories of personal trusts?
When a trust is created, the creator/grantor decides whether the trust will be a revocable or irrevocable trust.
Revocable Trust - Also called a living trust, this is an agreement under which the grantor places property in a trust within which the property is managed. This trust is the most common and provides the grantor lifetime flexibility over assets and provisions of the trust. The grantor reserves the right to revoke the trust and typically, the agreement provides that upon death, the property will go to the named beneficiaries either outright or in trust.
Irrevocable Trust - An irrevocable trust cannot be changed or terminated by the grantor after the trust document has been executed. One of the primary benefits of choosing an irrevocable trust is the potential tax advantages. If beneficial ownership and control of assets are forfeited, the trust assets are not considered a part of the estate upon death, and therefore are not subject to estate taxes.
Who are the parties involved in the trust?
Grantor - the person creating the trust.
Trustee - person or company who will manage and administer the trust.
Beneficiary(ies) - people who will receive the assets held in trust.
How do these trusts avoid probate?
Once a grantor executes a trust, they must transfer title of assets to the trustee. Therefore, they do not own the assets and their assets cannot be included as part of their probate estate. Testamentary trusts, which are trusts created by a will after death, do not avoid probate.
What is the cost to create a trust?
Costs vary depending on the complexity of the provisions — how the grantor wants to distribute the trust after death and the type of assets held within the trust. However, the cost of setting up a trust may be largely offset by the amount the trust would save in probate fees.
Can a trust reduce estate taxes?
Revocable trusts have no effect on estate taxes; however, irrevocable trusts, if properly structured, will reduce the federal estate tax liability for individuals owning significant assets.
What is an Irrevocable Life Insurance Trust (ILIT)?
An ILIT is a trust that owns a life insurance policy, and is held outside of the estate, providing exclusion from the estate and liquidity for federal estate taxes.
