8 Things To Consider When Choosing A Trust
Embarking on the journey of estate planning is a significant endeavor which requires a substantial amount of thought and effort. One of the most crucial decisions an individual will make during this time is which type of trust, or which combination of trusts, to create. As they navigate the complexities of safeguarding their assets, providing for loved ones, and optimizing tax implications, the various options in the realm of trusts can be both empowering and overwhelming.
In this blog, we’ll delve into the key considerations that you need to weigh before deciding on the type of trust(s) that align with your unique goals and circumstances. From understanding the purpose of the trusts to navigating the intricacies of tax planning, come along and allow us to demystify the world of trusts and empower you in your estate planning decisions!
Why Do People Create Trusts?
People choose to create trusts for a multitude of reasons, each reflecting a distinct set of financial, familial, and long-term planning goals. At the heart of this decision often lies the desire to provide a secure and structured pathway for the transfer of assets to loved ones. Trusts offer a host of advantages when it comes to estate planning, as they mitigate tax burdens, protect assets from potential creditors, and ensure a smooth transition of wealth from one generation to the next. In short, they represent a strategic and forward-thinking approach to preserving one’s financial legacy!
There are many different types of trusts a person could choose to create, such as:
- Revocable living trust
- Irrevocable living trust
- Testamentary trust
- Charitable remainder trust
- Charitable lead trust
- Special needs trust
- Generation-skipping trust
- Qualified personal residence trust
- Dynasty trust
- And more!
Here are the 8 things that you and your estate planning attorney should consider when choosing the type of trust(s) you will create:
- Purpose And Goals
Some trusts have specific purposes and accomplish very distinct goals, so you will need to determine what your own goals are before choosing the type of trust you create. For example, special needs trusts (SNTs) are designed to allow a person to set aside money for a loved one or dependent with special needs in a way that will not jeopardize their eligibility for government benefits. As another example, spendthrift trusts can be used to limit the funds available to heirs who have a hard time managing their money or who have many creditors. Therefore, you’ll need to have a clear purpose for creating a trust, and be able to share that with your estate planning attorney so that they can help you narrow down your options.
- Assets And Property
Similarly, you need to consider the type of assets and property you plan on putting into the trust before you can effectively choose the right one for your situation. Some trusts are specifically designed to hold only financial assets like stocks, bonds, and cash; consequently, another trust might be established to hold real estate. Some trusts may even have provisions that dictate the allowable nature of assets, either for administrative ease, tax planning, or other reasons. Your attorney can help you gain a better understanding of which type of trust would benefit and protect your assets and property best.
- Beneficiaries
The beneficiaries of your trust are the people, charities, or entities who you designate to inherit what is in the trust following your death. While many people have an idea who they will name (such as children, grandchildren, spouses, and other close relatives), you’ll need to seriously consider several factors about those individuals before you choose the trust you create, such as their age, their financial skills, their health, and more.
Using our previous example, SNTs are designed for a beneficiary with special needs, and spendthrift trusts are designed for individuals who may not have good money management skills. Therefore, having an understanding of those you intend to name as beneficiaries can give you a better idea of which trusts would be more beneficial.
- Control And Management
Some types of trusts, like revocable living trusts, offer the creator (grantor) a great deal of control over the contents of the trust, as well as the terms. Others, like irrevocable trusts, do not offer control, and once they are created, cannot be altered. There are benefits and drawbacks to both types of trusts, but you’ll need to assess the amount of control you want to have over your trusts before you can make the best decision.
There is also the issue of managing the trust. While some can be either actively or passively managed by the grantor, some require professional management, which can lead to additional administrative costs. Generally, the more complex a trust and its assets are, the more management it will need.
- Tax Implications
Some trusts offer better advantages when it comes to taxes than others. There are varying tax treatments for income generated by trust assets, depending on the type of trust they are in. There may also be potential to reduce the amount of the estate that is taxable. Additionally, some trusts may be subject to gift taxes depending on the value. Therefore it is necessary for you to have a clear understanding of the tax implications of whatever type of trust(s) you choose.
- Flexibility
Again, certain trusts – i.e., revocable trusts – offer much more flexibility than others – like irrevocable trusts. Flexibility refers to your ability as the grantor to amend, restate, and/or revoke your trust. You’ll need to weigh how important flexibility is to you and determine whether it’s necessary to fulfill the purpose of creating the trust and to accomplishing your goals.
- Charitable Giving
Finally, you’ll want to have made a definitive decision regarding whether or not you plan to designate a portion of your assets to a charitable organization. Most people choose to do this purely out of the goodness of their heart, in order to leave behind a philanthropic legacy. But, there are other advantages that come along with charitable trusts, such as tax deductions, the preservation of highly appreciated assets, and more.
Still Feeling Uncertain? Villegas Law Firm Can Provide Clarity
Our lead attorney, Jorge Villegas, has helped empower countless clients on their estate planning journey. He will ensure that your questions are answered and your concerns addressed, so that you feel confident in every decision you make regarding the creation of your trust! Clients we’ve worked with in the past can attest to his attention, promptness, and professionalism. Call today to schedule your free consultation and learn more about how we can aid you in the trust creation process.