Broker Check
The Role of Trusts in Estate Planning

The Role of Trusts in Estate Planning

August 16, 2023

Estate planning can be a time-consuming and complex process, but you can work toward simplifying what your loved ones will go through after your passing through the creation of trusts. Trusts are a specific type of arrangement that can present unique tax benefits and can even allow your beneficiaries to bypass the probate court process, getting to the financial benefits faster. 

What should you know about estate planning with trusts? This comprehensive guide will walk you through the early stages of thinking about whether a trust could be a smart move for your financial estate. 

Understanding Trusts in Estate Planning

Estate planning involves more than simply writing a will. A will lets the probate court know what your final wishes were. On the other hand, a comprehensive estate plan includes a will but also comprises other key documents such as trusts, power of attorney, and advance directives. A robust estate plan can be a smart financial move.

One of the core components of a solid estate plan is the creation of a trust. A trust is an agreement where a third party can hold your assets for distribution to the people you designate as the recipients of that trust. 

The third party that holds the assets is known as the trustee and the people who will receive the assets are known as the beneficiaries. The creator of the trust is sometimes referred to as the trustor, but I prefer to use the term grantor. 

Benefits of Trusts in Estate Planning

Estate planning with the creation of trusts comes with benefits for loved ones after your passing. Here are a few benefits of implementing trusts in your estate plan.

Avoid Probate 

Probate court can be a long and tedious process, sometimes stretching out months after your passing. It can tie up the funds that you designated to help care for your loved ones, even if there is no one around to contest your will.

A trust eliminates most of the headache of going through a probate court experience. The development of a trust makes it clear who is meant to receive what. Plus, it allows the payout to take place much sooner than a lump sum payment issued through probate court.

Providing for Loved Ones

A trust also helps you to provide for those you are leaving behind: minors, surviving family, or any loved ones who may have special needs. They can get a predictable payment on a schedule that can be earmarked for their care. Even in your absence, you can rest assured that your loved ones are taken care of properly with the funds you set aside.

Family protection trusts are one specific type of trust aimed at maximizing tax benefits and safeguarding your beneficiaries.

Tax Benefits 

Last but not least, there are tax benefits to establishing a trust. With the creation of a trust, you remove the assets placed within it from your net worth. Because the trust is no longer considered part of your estate, it can save your loved ones quite a bit in taxes. 

There are other tax benefits that you may want to consider with the creation of a trust as well, such as charitable tax deductions for charitable trusts. You may also be able to avoid capital gains tax when you sell real estate within charitable remainder trusts

Common Estate Planning Trusts 

With all of these benefits in mind, you may want to take the leap into forming a trust for your estate planning. Before you do, it is important to note that there are multiple types of trusts, so you will need to select the type that makes the most sense for you:  

  • Living Trusts: A trustor may use a living trust to protect their assets and manage the distribution of those assets after their death. Living trusts can be revocable or irrevocable, but they can all skip the probate process.  
  • Testamentary Trusts: This type of trust is created as part of your will, establishing the trust only after your passing. This type of trust is created by probating your will. These have increased in popularity since the enactment of the Secure Act of 2019.
  • Irrevocable Trusts: Irrevocable trusts are permanent arrangements where the trustor cannot make any changes to the trust after it has been established. They also cannot end the trust. Essentially this trust takes on a life of its own and is ruled by the original terms, including its own dissolution.
  • Revocable Trusts: This is the opposite of an irrevocable trust. Revocable trusts do allow the trustor to alter or even cancel the trust. Because of this retained power, these types of trusts do not offer asset protection, only the ability to bypass probate. They are also included in your gross estate for tax purposes.
  • Charitable Trusts: Charitable trusts are irrevocable trusts that provide payouts to beneficiaries and leave a remainder of the account for donation to the charity of your choosing. 

Considerations for Setting Up a Trust 

Once you’ve decided that a trust is the right move for your estate planning, there are a few things to consider first.

To start, be aware of the costs involved with the initiation of a trust. You will also need to work with professionals well-versed in legal, financial, and tax areas. Trusts often involve all three areas, and a comprehensive team will help ensure you make savvy moves. 

You will also need to plan for the complexities and restrictions associated with trusts, so that you do not lose control over the assets that you place within the trust.

Finally, be aware of the stipulations on the type of trust you select to create. For example, you may be unable to make changes to your trust if you set it up as an irrevocable trust. 

Get the Help You Need 

Estate planning is a complex process with high stakes for your future financial legacy. Magellan Planning Group offers coordinated legal, financial, and tax professionals all under one roof, working to avoid any gaps in your estate planning. We can help you with the creation of a trust that will allow your beneficiaries to reap the benefits for years to come.  

Contact Magellan today to learn more about how we can help you establish a trust for your loved ones. 

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.

The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies.