An Introduction to Trusts as Estate Planning Tools
The term “trust” may sound vaguely familiar as a kind of estate planning tool, but it can be difficult to understand the different types and the advantages they offer. Keep reading to receive an introduction to the different kinds of trusts recognized by the State of Wisconsin and whether a trust is the right fit for you.
What is a trust?
In general, there are three different parties who participate in a trust. The “grantor” is the individual who owns the property, wealth, or assets and wants to create a trust. The “beneficiaries” are the individuals, entities, or organizations who will benefit from the property or other assets held in a trust. When the grantor creates a trust, the grantor designates who the beneficiaries will be. The grantor also decides when and how the trust assets are distributed to the beneficiaries. Finally, the “trustee” is an individual or entity who holds and manages the property in a trust for the benefit of the beneficiaries. A trust relies on these three parties to function.
Why would someone want to create a trust?
There are many reasons why a person might want to create a trust, but there are some general advantages to this kind of estate planning tool. One of the advantages of a trust is that the grantor can retain some control over the assets within the trust. For example, a trust can be used to designate funds for a particular purpose, like a mortgage or school tuition. A trust can also be used to maintain finances for minor children before they become adults. Another feature of a trust is that the grantor can dictate the purpose for which funds can be withdrawn. Trusts are also useful tools for contributing to charities and other organizations. Finally, depending on the kind of trust a grantor creates, a trust may be subject to fewer taxes and/or avoid the probate process altogether.
What types of trusts are there?
There are four main types of trusts. The first is a revocable, or living, trust. A grantor with a revocable trust can change the terms of the trust, including the beneficiaries, assets within the trust, and the trustees, at any time prior to death. A revocable trust allows a grantor to retain substantial control over the trust, but the trust is subject to taxes. Think of this kind of trust as its name suggests, “living,” with the ability to change or grow.
The second is an irrevocable trust. This kind of trust is very rigid. Once the grantor decides the details of the trust, like naming the beneficiaries, trustees, and the terms, they cannot be changed. In a trust like this, the grantor does not get to keep very much control over the trust once it is made. However, this kind of trust is subject to neither probate nor taxes.
The third is a marital trust. This kind of trust is usually created in order to provide for a grantor’s spouse after the grantor dies. This can be a useful tool, but it is important to note that this kind of trust is taxed as part of the grantor’s estate when that person dies.
The fourth is a testamentary trust. A testamentary trust is written into a grantor’s will and is created after the grantor’s death. Both taxes and the probate process may apply to testamentary trusts. Because of these processes, a testamentary trust usually requires a longer period of time before the beneficiaries begin to benefit from it.
Now that you have a clear idea of what types of trusts there are, you may have questions about your own estate plan. Contact an attorney at Kelly & Brand, Attorneys at Law, LLC, who will help you evaluate your estate plan and determine if a trust could be a useful tool for you.