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What Is the Purpose of a Trust in Estate Planning?

What Is the Purpose of a Trust in Estate Planning?

| December 11, 2023

If you own a home, have children, or hold investments such as stocks or other real estate, it’s important to consider estate planning and establishing a trust.

You may think such a suggestion doesn’t apply to you if you’re young, healthy, and middle class. But estate planning isn’t only for ultra-wealthy seniors.

Estate planning can help protect your family if the unexpected happens, ensuring that your assets get passed along to your heirs and potentially sparing your family unnecessary legal and court fees and a tax bill you didn’t expect.

Benefits of a Trust

A well-prepared trust plays an important role in estate planning. This legal arrangement allows you, the grantor, to transfer property to a trustee to hold for the beneficiaries you name.

There are several types of trusts, and a financial advisor can help you choose the right one. Whether you decide to establish a trust may depend on the value of your assets and your family dynamics and circumstances. Regardless, there’s value in understanding how one can help protect you and your family.

As part of the estate planning process, you can establish a trust determining how your property will be distributed through your will.

This kind of trust is known as a testamentary trust, and the provision of assets is contained within the will. A trust created during your lifetime is called a living trust; the trust document lays out what will happen to your property after your death.

Living trusts can be revocable, meaning they can be altered, or irrevocable, which means they’re effectively set in stone.

Both arrangements can aid your family by providing for the management of your assets when you can no longer do so yourself and distributing the property according to your wishes after your passing, with the least possible involvement by the courts.

Control How and When Assets Pass to Heirs

Setting up a trust gives you flexibility in your estate planning.

By creating a revocable trust, you can maintain control over your property while you’re still alive and can manage your assets. When you pass, whatever property remains will be distributed in a fair and timely fashion to the beneficiaries you’ve named and in the manner you’ve specified.

For this reason, trusts can be especially beneficial to families with special situations, such as children from other relationships or an unmarried partner.

A trust spells out your intentions rather than leaving it to the courts to dole out portions of your assets based on state laws or requiring family members or partners to engage in protracted (and often bitter) legal battles.

When organized intelligently, a trust can also prevent creditors from going after assets left to your heirs and protect certain assets from beneficiaries you fear may not manage them well.

Avoid Probate Court

When a trust is established through a will, which must be filed with the court, it generally has to go through probate court in most states after the grantor’s passing. In most cases, a court will honor your wishes, especially if you have a living trust, which names beneficiaries and states how and when your property should be distributed.

The probate process is public and could lead to court costs and legal fees. However, the living trust could allow the trustee to pass assets to your heirs with privacy and without unnecessary expenses.

Reduce Your Tax Burden

Traditionally, trusts have been used to reduce an estate’s taxable assets: the houses, vehicles, stocks, retirement accounts, life insurance policies, collectibles, and debt someone holds. However, the current filing threshold is $12.92 million if you pass in 2023. That number jumps to $13.61 million in 2024.

The majority of people don’t reach the filing threshold for estate taxes. Still, trusts come with distinct tax advantages, especially irrevocable ones. You can reduce your taxable income and possibly avoid estate and inheritance taxes for your heirs by turning over control of your property to a trustee.

Another type of trust that can offer tax benefits is an irrevocable life insurance trust (ILIT). An ILIT is managed by a trustee, who pays the premiums, collects the benefits, and makes the payouts to beneficiaries upon the holder’s death.

ILITs are complex, but they have two major perks: They aren’t counted in your estate, and they can give your heirs the money they need to pay off your taxes.

Start Planning Today  

If you have assets you want to pass down or loved ones you want to take care of in the event that something happens to you, consider adding a trust to your estate plan. Connect with the financial advisors at Good Life Morehead City for expert advice on how best to structure your plan.