By: Waishan Lee, CPA
Among the safest and most tax-efficient ways to transfer assets is by using a trust. A properly drafted trust document is specifically designed to be both for the benefit of a third-party person or entity and protects the property that was transferred to the trust. But, do you know what exactly a trust is and how you can use a trust to benefit your loved ones, charities and even yourself? Today, we’ll provided a high-level overview of these incredibly useful vehicles.
Every trust has three key players. These players have different roles and responsibilities, and the breadth of what each do may differ slightly from state to state:
Grantor – A grantor is the person or entity that establishes a trust and legally transfers control of assets to a trust. The grantor may also be referred to as the settlor, trustmaker, or trustor. In certain types of trusts, the grantor may also be the beneficiary, the trustee, or both.
Beneficiary – A beneficiary of trust is the individual or group of individuals or entity for whom a trust was created. The grantor designates beneficiaries and a trustee.
Trustee – A trustee is a person or entity that controls and administers property or assets for the benefit of a beneficiary. Trustees have a fiduciary responsibility in accordance with state law to the trust beneficiaries.
What is a Trust?
Under most state laws, a trust is established when the grantor contributes money or property into a trust and the trust becomes the owner of the property. A legal document must be created to give the trustee direction on how to manage the trust’s assets based on the terms in the trust for the benefit of beneficiary.
Trusts can either be revocable or irrevocable. If selecting a revocable trust, the grantor has the right to change the terms of the trust anytime. In contrast, in an irrevocable trust the terms cannot be changed, as the grantor has relinquished control of the trust assets. A revocable trust becomes irrevocable upon the grantor’s death.
Trusts could benefit you and the ones you care about. Below are the few more common ways they are used.
Certain assets which you own may have to go through the state probate process to ensure the property is distributed in accordance with the terms in your will. A trust, under certain circumstances, could avoid the probate process at your death. This could save time and costs and also reduce asset disposition concerns for your loved ones.
Grantors may also consider create irrevocable trusts for estate planning purposes. Unlike a will, an irrevocable trust could remove assets out from your estate avoiding estate tax on the assets at your death. Contributions to a trust are considered a gift and subject to gift tax but not to estate tax. In 2022, the gift tax annual exclusion amount is $16,000 by an individual and $32,000 for married filing jointly taxpayers. The lifetime gift tax exemption for 2022 is $12,060,000. Therefore, you could use the annual exclusion and lifetime gift tax exemption to your advantage to create tax benefits.
Set Up Specific Parameters on How Your Assets Will Be Passed On
If you are worried about your beneficiaries not using assets according to your wishes, a trust could include specific parameters and guides for the trustees. The trust could include conditions such as age, purpose, or achievements that the beneficiary needs to satisfy before receiving distributions. For example, you can have it stated in the trust terms that you would like your beneficiary to receive distributions under certain conditions, such as an educational milestone or attaining age 30. As the grantor, the terms are up to you.
The most common type of charitable trust is a Charitable Remainder Trust. A trust would be created to transfer assets which you want to donate to an IRS-recognized charity that has tax-exempt status. The charity will act as the trustee and manage the property you distributed to the trust to generate income for you for the period you specified in the trust term. At the end of this period, the assets in the trust will be transferred to the charity.
Help Your Loved Ones During Disability or Illness
Life is unpredictable. Creating a trust in advance to account for some of the possibilities could protect you and your loved ones if you become sick or incapable of managing your assets. Should that happen, the trustee could help you with different things, such as paying bills or providing financial support to those who depend on you. These conditions could be set up ahead of time to help trustee provide for the beneficiary’s needs.
Trusts can be complicated and complex and require an attorney to draw up your wishes in the terms. However, they can serve many purposes. If you want to learn more about trusts or how you could utilize trusts for wealth planning or to benefits the people you care about. Call on us for a consultation along with your attorney. The Tax Warriors® at Drucker & Scaccetti are experts in helping you to transfer your wealth in the most tax-efficient manner.