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None of us can predict the future. If
you want to make sure your family and
other heirs receive what you want them
to have, it is not too soon to do your
estate planning. Trusts can be a key
part of those plans. But under what
circumstances might you need to
establish a trust?
Before you choose a specific
trust, you need to know how trusts work.
Usually, a trust is a legal arrangement
in which you, as grantor, set up the
rules and appoint a trustee, who manages
the trust and its assets. You (and
possibly others) then fund the trust
with assets. The trustee collects these
assets and invests the money according
to the rules of the trust, which will
also determine the trust's beneficiary,
the recipient of the trust's proceeds.
Beyond these common traits,
trusts can be very different in their
intended purpose. Your individual
situation will dictate the type of
trust, or trusts, you choose. Here are a
few of the most common scenarios:
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If you want to give something to
charity you may want to consider a
charitable remainder trust (CRT). In
a CRT, you donate an appreciated
asset, such as shares of stock or a
piece of real estate, to the trust.
The trustee may then sell the asset
and use the proceeds to purchase a
portfolio of securities. From these
investments, you can receive an
income stream for life; upon your
death, the charitable organization
receives the remainder of the
principal. By setting up such a
trust, you defer capital gains
taxes, and you can claim a limited
deduction on your income taxes.
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If you want to reduce estate taxes,
explore an irrevocable life
insurance trust. If you own an
insurance policy, the proceeds are a
part of your taxable estate. To help
reduce the possibility of your heirs
having to pay estate taxes, you may
want to establish an irrevocable
life insurance trust. As long as the
trust owns the insurance policies,
the proceeds will not be included in
your estate. You might also be able
to use an irrevocable life insurance
trust to provide your family with
assets they might not otherwise have
received, especially if you have
given away a sizable amount to a
charitable organization through a
charitable remainder trust.
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You may want to think about a QTIP
(Qualified Terminable Interest
Property) Trust if you have married
for a second time but want to make
sure your children from your first
marriage are protected. A QTIP trust
enables you, as grantor, to provide
for your surviving spouse and also
maintain control of how the trust's
assets are distributed once he or
she also dies.
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If you think your children or
grandchildren might "burn through"
the money you leave them, you might
want to explore a discretionary
trust, which gives an independent
trustee full authority to make
decisions on how the trust funds may
be spent for the benefit of the
beneficiary.
One final word: Trusts are
complex instruments, so you will need to
work with an attorney and CPA to make
sure your strategy can help you work
towards the goals you want. |
