Updated March 16, 2021

Trusts are one of the smartest tools to use when considering how best to transfer your wealth in a clear and easy manner. You may decide to create a revocable trust or an irrevocable trust. The essential difference between these two types of trusts is the amount of control the creator and trustee of the trust have in changing and directing the trust prior to the passing of the creator. Once guidelines and assets have been set for an irrevocable trust, they cannot be changed or touched. The trust is permanent. A revocable trust allows the creator and trustee to direct the assets within the trust, adjusting assets and guidelines up until the incapacitation or death of the creator.

Regardless of the type of trust you are seeking to create, these tips will be helpful to you in your journey. These tips start with broader information that will be helpful in the beginning stages of creating your trust and end with a few lesser known nuances of the process.

1. Be clear on your reasons

A living trust is just one option and has both advantages and disadvantages. Creating a living trust is complex and takes time. You will need to retitle, redeem or transfer the ownership of your assets, meet with banks, insurance companies, attorneys, etc. You’ll have to keep beneficiaries updated and stay active in the maintenance of the trust especially as life changes and circumstances change.

Even with these initial deterrents, a living trust is an excellent tool. Living trusts are a clearer way of transferring large assets to future generations and can relieve the burden placed on family members after your passing. The most notable relief for families is that living trusts bypass probate. In addition to this, living trusts maintain privacy. This can protect beneficiaries from outside pressures and keep transfers of wealth internal and protected.

Living trusts can also be created to dispense assets over time or in the future to a beneficiary which is most commonly used for minor children. These trusts can also serve as a plan for sudden incapacitating illness, not just death, and are often stronger than a power of attorney. In a high value estate, trusts may be beneficial in managing and diminishing the effects of inheritance or estate taxes.

2. Have an idea of who will fill each role

The terms for the various roles associated with a living trust are numerous and sometimes confusing. Many online sources are inconsistent with titles, often using a plethora of synonymous terms. So, here’s the low down.

The person who creates the trust is the grantor and this person is generally also the person who owns the assets that will go into the trust. This person may also be called a trustor, creator, alienor, benefactor, or settlor.

The beneficiary is the person who will eventually receive the asset and may also be referred to as the heir/heiress or inheritor.

The trustee is the individual who manages the trust, obtaining legal title to the assets and following the terms of the trust on behalf of the beneficiary. A synonym for trustee is fiduciary and may also be referred to as the executor or guardian. Often, the trustee will be the trustor, and a successor trustee will be named in the event of the passing of the trustor.

Being prepared with an idea of who will fill each of these roles before obtaining an attorney will be helpful

3. Identify appropriate assets

Perhaps you already have some assets in mind or you are still considering your options. It is important to think about what assets you have that will be most helpful to put in a trust for the health and longevity of your family and wealth. Here are several questions to help you determine what is and is not a smart asset to include in a trust.

1. What are assets you hold that you’d like to use during your lifetime, but that need to be carefully planned for?

2. What assets will be the cause of disagreements when you are gone?

3. What assets need special instructions, such as monies that need to be distributed to a minor when she comes of age?

4. What assets need to be privately passed?

The answers to these questions are good candidates to consider putting in your living trust.

4. Understand relevant tax implications

Estate taxes and inheritance taxes are often confused because they both occur when an individual becomes deceased and the individual’s assets are transferred to a beneficiary. The difference, however, is fairly simple. Estate taxes are taxes taken out of the assets of the deceased individual, while inheritance taxes must be filed by the recipient of the inheritance.

The federal estate tax exemption, as of 2019, includes any estate worth less than $11.4 million. Not all states have estate taxes, but the ones that do are much lower. For example, Washington state taxes estates worth over $2.193 million. While most people will not be affected by estate taxes, if you have a large estate, it may be worth discussing the possible benefits of an irrevocable trust to help mitigate estate taxes.

While an irrevocable trust may help manage estate taxes, a large transfer of wealth to a beneficiary may incur an inheritance tax. Exemptions to this tax may include lineal heirs or transfers of assets that do not exceed state limits. For instance, if you set up a living trust that directs smaller amounts of wealth to be transferred over 5 years after you pass on, instead of a lump sum in the first year, this wealth may not be taxed if the amounts are under the state limit.

5. Amass the paperwork

It can often be challenging to know what to do in what order when creating a living trust. As you dive into the details of creating one, you’ll likely make adjustments along the way. One helpful action is to gather pertinent documents of assets before going to an attorney. Gathering titles, deeds, leans, stock certificates and life insurance policies are all necessary documents to transfer ownership to a living trust. Having these documents will allow your attorney to place these assets in your trust sooner.

6. Include an incapacity clause

If the trustor and trustee are the same person, which is common, you’ll want to identify a successor trustee and also add in an incapacity clause. When you add an incapacity clause, you grant directorship to the successor trustee in the event of serious illness or mental incapacity. Doing this will eliminate issues that may arise if you are incapable of making decisions about your trust but still living. By adding in this clause, you bypass lengthy and sometimes tricky guardianship or conservatorship appointments. An experienced attorney will be able to handle this for you.

7. Take advantage of increased FDIC protection

Today, one of the major benefits of the FDIC is the protection it affords to an individual’s bank accounts or assets. Generally, the FDIC guarantees protection up to $250,000 to a bank account. That individual amount also applies to trust assets, however, because this is a per capita amount, the protection extends to every beneficiary separately.

8. Get assistance from an expert

No matter how many sites out there suggest that you can create your own living trust, the truth is that hiring an experienced expert is the only real way to navigate this process effectively and with assurance. At Anderson Advisors, we know the ins and outs of living trusts and our wisdom and knowledge are necessary in creating functional, trustworthy estate plans to ensure a smooth transition for you and your family. Be doubt-free and know your wealth and your heirs are taken care of.

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