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The What, Why, and How of Trusts

The What, Why, and How of Trusts

What is a Trust?

Understanding what a trust is involves recognizing it as a legal document that directs a third party (i.e., a trustee, though there are times you might be the trustee) to hold your assets on behalf of beneficiaries you establish.

Trusts are often part of estate planning as they provide more options to pass your assets on to children in a possibly tax-advantaged way. A trust can hold any of your assets including investment accounts, homes, cars, real estate, etc.

Who Needs a Trust?

Contrary to popular belief, a trust is not just for the wealthy. A trust can help you avoid time-consuming, costly, public probate. It can also be a protective measure you can use to safeguard your assets from potential creditors for your beneficiaries and may be beneficial for all sized estates.

Why Should I Use a Trust?

  • A trust provides protection of your estate in case of the unexpected. For example, if a beneficiary develops credit issues or if there is a divorce.
  • A trust is set up to help avoid probate, allowing beneficiaries to receive assets quicker.
  • Use a trust to manage unique assets that are not easily divisible (i.e., a closely held business, vacation home, pets, or commercial real estate).
  • Estate and gift, and even income taxes, may be reduced or eliminated based on the size of your estate.
  • You can set up asset-distribution controls based on family dynamics or needs.
  • Trusts can direct financial care for dependents with disabilities or young children.
  • A trust allows you to control when the assets are distributed and how the funds can be spent.

How Do I Decide Which Trust is Right For Me?

Deciding which trust is right for you can be complex. Many types of trusts can be used based on your wealth and goals for the distribution of your assets. You will want to enlist advisors with experience in trust planning to help you determine which is the best option for your estate. Here are some of the trust options:

Living Trust

A living trust allows you to change the terms, assets, and beneficiaries during your lifetime, as long as you are mentally and physically able to do so. They are revocable in addition to being able to be changed. Your needs for this type of trust can change over time such as the arrival of a new child. Typically, you should revisit your trust and estate needs approximately every five years.

Irrevocable Trust

With an irrevocable trust, once you put your assets in the trust and name the beneficiaries, it becomes a permanent decision. This type of trust might allow you to reduce your estate taxes because once the trust is funded, the assets are not owned by you as the trust owns them. A common use for this type of trust is to hold life insurance outside of one’s estate to provide liquidity for estate taxes after you pass.

Joint Trust

These trusts are primarily useful for couples who live in a community (marital) property state. They document what will happen to assets upon the death of each of the spouses.

Testamentary Trust

Trusts can be established as part of your will and don’t become effective until your will is probated. Then the assets pass through probate into the trust. After that point, the trust controls asset management and distribution.

Marital Trust

A marital trust is established to pass assets to the surviving spouse in a way that eliminates estate taxes due to the unlimited marital deduction. They are often used in conjunction with a credit shelter trust – also called a “B” trust. When the surviving spouse dies, the trust’s assets are transferred to the remaining beneficiaries without any estate taxes.

Qualified Terminable Interest Property Trust (QTIP)

A QTIP trust provides income for a surviving spouse and bequeaths assets to a different set of beneficiaries after the surviving spouse passes. The spouse generally cannot choose the final beneficiaries of the QTIP trust's assets and is usually limited to the income the trust designates.

Asset Protection Trust

This type of trust is designed to protect assets from the claims of creditors. Often these are set up in countries outside of the United States to insulate assets from creditors. They can have a set term where the trust maker is not the beneficiary, but when that timeframe is up, the trust maker may be able to be added as an additional beneficiary.

Special Needs Trust

If a person who receives government benefits such as Medicaid receives an inheritance, it could reduce or eliminate their eligibility for the benefits. On the other hand, a special needs trust is a legal and permitted way to provide supplemental funds for someone who receives governmental benefits without disqualifying them from receiving those benefits. 

Charitable Trust

Charitable remainder trusts (CRT) or charitable lead trusts (CLT) help lower or avoid estate and gift tax by designating philanthropic organizations that will receive the funds. There may be income tax benefits as well.

Dynasty Trusts

Just as it sounds, this trust can provide benefits to the grantor's children and grandchildren, and on and on, which avoids any estate taxes being levied against the estates of your descendants. This is an effective tool to preserve wealth for individuals with significant investments/assets.


What is the Role of a Trust in My Estate Plan?

Trust and estate planning are a collaborative process to determine what will happen to your assets upon death. Trusts are an essential financial planning tool to help minimize taxes and ensure your loved ones are cared for. You can direct who gets funds, when they get them, and how they can use them.

When you start or modify your estate plan, you should work with a team of advisors representing your individual needs. This team should include an accountant, legal counsel, insurance agent, and wealth manager. Share your goals and your team will develop a plan to help you protect your family with appropriate asset distribution and trust plans.

Understanding what a trust is and how it can benefit you is crucial. Trust are not one-size-fits-all; they are a tool for anyone looking to manage their estate efficiently.

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Biz Tip Topic Expert: Richard Kollauf - JD, CPA, CFP, AEP

Richard Kollauf - JD, CPA, CFP, AEP

Richard is a Principal for SVA Certified Public Accountants and has more than 35 years of experience working in financial, accounting, and legal operations. Richard’s expertise in the multi-faceted financial environment includes business succession planning, tax, investments, finance, mergers and acquisitions, estate planning, and trust administration. He also has experience in estate planning and distribution for complex operational and investment multi-state businesses. Richard provides income tax consulting services to closely-held and family-owned businesses, as well as high net worth individuals.

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