Estate Planning can be confusing, but incorporating a trust may be a good way to start.
Considering whether setting up a trust is the right option for your estate plan? They are a lot less complicated than you might think.
Even if you are just starting to consider an estate plan, you have probably run across a tool called “trusts.” There are many types of trusts, and, for some, the sheer number of options you have when it comes to trusts can be intimidating. The truth is, however, setting up, maintaining, and using trusts is actually very simple. Each type has the same basic elements and process to get started.
Consider living trusts as an example. Living trusts are exactly what they sound like – you create it while you are alive. In many situations, a living trust simply serves as a depository or storage method while you are alive. Then, after you pass, the trustee distributes your assets as you direct to avoid probate.
In this situation, it is a simple, straightforward way to do estate planning. In comparison to distributing your property through a will, a trust is often a faster and more effective solution. Nonetheless, setting up this type of trust is as easy as setting up a will. It just requires some advance planning to ensure that all of your assets make it into the trust before you pass.
A Brief History of Trusts
In England, long before the United States was established, citizens were taxed at death if they owned and enjoyed property that was still in their position at the time of their passing. The concepts of “owning” and “enjoying” were both required to trigger the tax. Citizens discovered that if they could show that the person who owned the property and the person who enjoyed the property were not the same, then it was possible to avoid paying taxes on it.
This distinction led to the creation of the first trust. By creating a method to separate ownership from enjoyment, the English residents could avoid paying taxes to the king. However, they could still direct how their property would be used by providing instructions for the holder of the property, which is still how trusts function today.
Trusts may seem complicated, but they do not have to be. Anyone can set up a trust that works for them.
A Trust is a Trust is a Trust
While trusts may seem complicated because of the many options available, they really are not. The only differences among trusts are the set of instructions that are attached. These instructions also determine the name of the trust. However, these names are not official titles. They are just nicknames that have developed over time to distinguish trusts by their instructions. That means that asset protection trusts are just like other trusts, but with specific instructions that are designed to help protect your assets.
Trusts involve three basic parties:
• Grantor/Trustor/Settlor: the person who puts assets in
• Trustee: the person who manages the funds and follows the instructions
• Beneficiary: the person who gets the benefit
The grantor, trustee, and beneficiary can all be the same person, but they do not work as well as an asset protection tool if you are both the grantor and the beneficiary of the trust.
One of the easiest ways to understand trust is to compare it to giving instructions to a babysitter. Imagine you are going out for the evening and you are leaving your child with a babysitter. You give the babysitter instructions on what the child should eat, what activities they might do, and when it is time to go to bed. In this situation, you, as the parent, are comparable to a grantor or trustor in a trust. The babysitter is comparable to the trustee, and the beneficiary is the child. The instructions you gave the babysitter are just like the instructions you would provide in a trust so the trustee knows how to handle your assets. Every trust is this simple at its core.
Revocable and Irrevocable Trusts
The only real difference between trusts is whether they are revocable or irrevocable. In a revocable trust, you maintain the power to change the trust later. You can adjust the beneficiaries, make changes to how assets are deposited, alter the instructions, and even cancel the trust altogether. Revocable trusts are often synonymous with general “living trusts.”
Irrevocable trusts, however, you do not have these options. Instead, you are “stuck” with the trust as it was laid out when created. Living trusts will become irrevocable upon the death of the grantor.
Using Our Resources
Trusts do not have to be complicated. Setting one up is a lot more straightforward than you might think. Be sure to stop and think about why you are setting up a trust because that will dictate how you should prepare the instructions. Find more information by using the extensive resources at Protect Wealth Academy.
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