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Money Goals

When Do Trusts Make Sense?
Basic Trusts and How They Work

Trusts are estate-planning tools that allow you to transfer property according to your wishes while minimizing tax and probate headaches. A trust is a legal entity that holds assets for the benefit of another in which one person, known as the grantor or trustor, creates and funds the trust. The trustee controls and manages the asset for the benefit of another person, known as the beneficiary.

Trusts are not only for the wealthy. It's not so much about the amount of money or valuable assets as finding the best way to protect them. Here are the basic reasons you might consider a trust:

  • You are interested in asset protection from creditors;
  • You want your assets protected or spent a certain way if you're incapacitated;
  • You want to support your current spouse if you die, but you also want specific assets to go to your children from a previous marriage;
  • You want to provide for a disabled relative without disqualifying them for government assistance;
  • You want to reduce your estate tax liability.

These documents vary in purpose and complexity, but here are some commonly used trusts. For any of these options, you should get the advice of a financial planner and/or estate-planning attorney.

Revocable living trusts: A revocable living trust allows you to dictate the management of your assets during your lifetime. This trust allows you to avoid probate, maintain control of assets and directs a successor trustee to step in and manage trust property for you if you're incapacitated or otherwise unavailable to direct those assets. You, as trustee, can revoke this trust at any time.

Bypass trusts: This kind of trust is established by wealthy couples to shield surviving spouses and other family members from a big estate tax hit. This trust pays income to a surviving spouse until he or she dies and then can distribute principal to other family members or pay them income under a similar structure.

Charitable remainder trusts: Individuals with a highly appreciated asset that is producing little or no income can transfer this asset into this trust. The trustee sells the asset and reinvests the proceeds for current income to the grantor. This individual avoids capital gains taxes on the donated assets and gets an income tax deduction for the fair market value of the trust's remainder interest, and the asset is removed from the estate. The remaining assets go to a designated charity or charities at the grantor's death.

Irrevocable life insurance trusts: This is a trust set up to own a life insurance policy that pays a death benefit that won't be included in the gross estate of the insured after he or she dies. Such a trust can be structured so the trust can provide payments to the insured's surviving spouse without inclusion in the surviving spouse's gross estate either.

Life goals. Money goals. In that order.

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