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Published on June 19, 2020 | LPL Financial
Contrary to what many people think, trusts are not reserved only for the wealthy. The truth is, people from all walks of life may benefit from a trust.
Generally speaking, a trust is a legal entity that allows someone to transfer the legal title of an asset to one person while assigning control of the asset to another. The person who creates the trust, the original owner of the asset, is known as the grantor. The person who manages the trust is known as the trustee. And the person who receives the benefits is known as the beneficiary.
The trust’s grantor names a trustee to handle investments, manage trust assets, and make decisions regarding distributions. The grantor can work with the trustee on major decisions in a revocable trust, or the trustee can be assigned full authority to act on the grantor’s behalf. A trustee may be an individual such as an attorney or accountant, or it may be an entity that offers experience in such areas as taxation, estate tax law, and money management. Trustees have a responsibility — known as “fiduciary responsibility” — to act in the beneficiaries’ best interests.
Trusts are drafted as either revocable or irrevocable and may take effect during your lifetime or after death.
Although trusts can be used in many ways, they are most commonly used to:
Generally speaking, most people use trusts to help maintain control of assets while they’re alive and medically competent, as well as indirectly maintain control of the disposition of assets if they’re medically unable to do so or in the event of death.
Different kinds of trusts are designed to meet different needs and objectives. The examples that follow are some of the types that may be available to you.
A living trust takes effect during your lifetime and allows you, as grantor, to be both the trustee and the beneficiary. Upon your death, a designated successor trustee manages and/or distributes the remaining assets according to the terms set in the trust, avoiding the probate process. In addition, should you become incapacitated during the term of the trust, the successor or co-trustee can take over its management. An irrevocable life insurance trust (ILIT) is often used as an estate tax funding mechanism. Under this trust, you make gifts to an irrevocable trust, which in turn uses those gifts to purchase a life insurance policy on you. Upon your death, the policy’s death benefit proceeds are payable to the trust, which in turn provides tax-free cash to help beneficiaries meet estate tax obligations.
A qualified personal residence trust (QPRT) allows you to remove your residence from your estate and reduce gift taxes while you get to use the home for a predetermined number of years, after which time ownership is transferred to the trust or beneficiaries. The potential drawback is that if you die before the term of the trust ends, the home is considered part of your estate. A generation-skipping trust can help you leave bequests to your grandchildren and avoid or reduce your generation-skipping transfer tax exposure, which can be up to 40% on the federal level in 2018.
A charitable lead trust (CLT) lets you pay a charity income from the trust for a designated amount of time, after which the principal goes to the beneficiaries, who receive the property free of estate taxes. However, keep in mind that you’ll need to pay gift taxes on a portion of the value of the assets you transfer to the trust.
Another charitable option, the charitable remainder trust (CRT), allows you to receive income and a tax deduction at the same time and ultimately leave assets to a charity. The trustee will use donated cash or sell donated property or assets, tax free and establish an annuity payable to you, your spouse, or your heirs for a designated period of time. Upon completion of that time period, the remaining assets go directly to the charity. Highly appreciated assets are typically the funding vehicles of choice for a CRT.
Different types of trusts and trustees can require a variety of fees for administration and wealth management. As you develop your trust strategies, remember to consider the costs that may be involved and weigh them carefully in relation to the benefits.
Although not quite as popular as wills, trusts are becoming more widely used among Americans, wealthy or not. Increasing numbers of people are discovering the potential benefits of a trust — how it can help protect their assets, reduce their tax obligations, and define the management of assets according to their wishes in a private, effective way.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
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