A trust is an agreement used in estate planning that states what you want to happen to the assets held in that trust.  Assets you can transfer into a trust can include, but are not limited to, real estate, bank accounts, stocks and bonds, jewelry, and life insurance policies.  There are a few key terms to know when talking about trusts.

Grantor (or Trustor) – This person sets up the trust.

Trustee – This person is in charge of the trust.  Typically, the trustee is the grantor until the grantor passes away.  While living, the grantor names a trustee to manage the trust after they are gone.

Beneficiary – This person, or persons if beneficiaries, benefits from the trust in some way.

You may wonder why a person would need a trust; can’t a will do the same things a trust can?  Yes and no.  Both are legal documents that state what you want to happen to your assets after your death.  A trust, however, typically avoids the probate process.  During the probate process, the validity of a will is determined.  This process can take quite some time, which would mean assets left for beneficiaries would not be released for some time.  Also during the probate process, if the deceased had any debt or taxes needing to be paid, the collectors can come and claim what is owed from the estate assets.  Because a trust usually avoids the probate process, you can see why it may be beneficial.

Other benefits of a trust include:

  • Control – You can specify exactly what the terms of the trust are. You can control when and to whom distributions should be made.
  • Protection – A properly constructed trust can help protect your estate from beneficiaries who may not be good at money management and/or from your heir’s creditors.
  • Privacy – Probate is a matter of public record so a trust may allow your assets to stay private. Avoiding probate also saves time and court fees.

There are many types of trusts, but a major distinction between them is whether they are revocable or irrevocable.

Revocable Trusts

A revocable trust, also known as a living trust, allows the grantor the right to alter, change, modify, or revoke it entirely.  Because the grantor has full access to the assets in a revocable trust, the grantor’s creditors also can get access.  The assets in a revocable trust are included in the grantor’s estate, and thus can be subject to estate taxes.

Irrevocable Trusts

Once assets are transferred into an irrevocable trust, no one, not even the grantor, has access to them.  An irrevocable trust is one which cannot be altered, changed, modified, or revoked.  Because these assets can no longer be accessed by the grantor, they typically are then exempt from estate taxes.  Any income generated by the trust assets also may be exempt from income taxes.

Life Insurance and Trusts

There are some situations in which it may be better to name a trust as a beneficiary to a life insurance policy instead of an individual.

For example, if your beneficiaries:

  • Are minors (under age 18)
  • Have special needs
  • Have creditor issues
  • Have alcohol/drug issues
  • Cannot be trusted with large sums of money

Then naming the trust instead of the individual as beneficiary is best because you can specify exactly when and how much they can receive, and the trustee can manage it for you on your behalf.

Many issues can arise when creating a trust, and each state has different laws that can affect trusts as well, so work with an attorney experienced in estate planning to be sure it’s properly constructed.  If you already have a trust set up and are looking to purchase life insurance to supplement your estate plans, take a moment to run some term life insurance quotes.  Term life insurance is very flexible and affordable.  We can help you get the coverage best for your individual situation.

 

Photo credit to: Andrew E. Larsen

 

Related Posts:

Choosing Your Life Insurance Policy Beneficiaries

Your Family Financial Roadmap

Types of Life Insurance Riders

Pin It on Pinterest