Estate planning 101: Common types of trusts

WWhile many people prefer not to think about it, death is an unfortunate reality that must be planned accordingly. Estate planning includes necessary things like a will, care, and powers of attorney. Setting up a trust is a great start for you and your heirs to have peace of mind.

A trust is an effective wealth planning tool that is often disguised in confusion. In reality, trusts can be quite simple depending on the wishes of the grantor, the person who is financing the trust. Some trusts are effective once the grantor signs the documents and obtains a federal employee ID number, while others are enforceable only after the grantor’s death. If properly established, a trust can easily flow assets to the beneficiary – the person or persons who reap the benefits of the trust. This turns out to be an advantage as it keeps property away from the probate process and can even reduce or eliminate the tax on the assets within the trust. A trustee is a person, often a sane person over the age of 18, who administers the trust.

Trusts are either revocable or irrevocable. A revocable trust can be changed or canceled at any time by the grantor, who often acts as the trustee. Often, in a revocable trust, the grantor, trustee, and primary beneficiary are the same person. The assets in the trust are still owned by the grantor and therefore all income generated by the trust must be reported on their personal taxes. Revocable trusts become irrevocable when the grantor dies. An irrevocable trust cannot be altered or revoked by the grantor without the consent of its beneficiaries. Irrevocable trusts are also generally more tax-advantaged compared to the revocable trust because the grantor relinquishes full control of the property after the transfer. In other words, they are at the mercy of their trustee.

A living trust is one of the most commonly used types of trust. This type of trust is created by the grantor during its lifetime using assets intended for the grantor during its lifetime. Upon the death of the grantor, the assets are then transferred to the beneficiary. A living trust can avoid any probate in court as long as the trust is properly funded and managed. Living trusts are almost always revocable for the life of the grantor and become irrevocable upon their death.

A testamentary trust, also known as a will, is established through a person’s last will and will. This trust is used to appoint a trustee to manage and distribute the assets of the grantor upon death. After the probate court determines the legitimacy of the will, the executor will transfer the assets by will into a testamentary trust. Allows you to set restrictions and restrictions on when and how assets can be accessed by the beneficiaries.

A common trust, often known as a credit shelter trust, allows individuals to minimize or potentially eliminate any estate taxes upon the death of a spouse. The assets transferred will not increase the value of the second spouse’s estate as the trust is owned and administered by a disinterested trustee. The surviving spouse can then access the trust’s assets under the terms of the agreement for things like medical emergencies, education funds, etc. When the second spouse dies, the assets are not subject to any estate tax when they are transferred to the remaining beneficiaries.


Roman Basi is a lawyer and CPA at Basi, Basi & Associates at the Center for Financial, Legal & Tax Planning. He regularly writes about problems entrepreneurs face. Ian Perry, staff accountant at Basi, Basi & Associates, contributed to this article.

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