Trusts are misunderstood by many people that are new to the concept of estate planning. There are multiple types of trusts, and they are not exclusively for very wealthy people. In this post, we will look at three reasons why you may want to utilize a trust when you are planning your estate.
Estate Planning for Second Marriages
If you are getting remarried as a parent, you may have concerns about the inheritances that you want to leave to your children. This type of situation can be magnified if you have significant resources, and you are quite a bit older than your new spouse.
To account for this dynamic, you can convey assets into a qualified terminable interest property (QTIP) trust. Your spouse will be the first beneficiary, and your children would be the successor beneficiaries of the trust.
Assuming you die first, the trustee that you name in the document would distribute the trust’s earnings to your surviving spouse. When you are drawing up the trust agreement, you could give the trustee the discretion to distribute portions of the principal under some circumstances.
Your surviving spouse will also be able to use property that is owned by the trust. For example, if the trust is the owner of your home, your spouse could live in it for the rest of their life without owning it.
The terms of the trust would be set in stone, and the first beneficiary would have no ability to change them. After their passing, your children would inherit the assets that are contained in the trust.
You can use a trust to lead a beneficiary toward positive behavior or away from self-destructive actions. Let’s say that you are going to be leaving an inheritance to a granddaughter that will probably be close to college-age when you pass away.
Under these circumstances, you could fund an incentive trust and make your granddaughter the beneficiary. In the trust agreement, you can instruct the trustee to pay school tuition and all living expenses as long as your granddaughter is a student in good standing.
There could be a larger lump sum distribution as a reward for graduation, and there could be further incentives for graduate school. To encourage a work ethic, you can dictate a dollar for dollar match of money earned on the job after your granddaughter has completed her education.
This is just one example, but the incentive structure would be entirely up to you.
Estate Tax Efficiency
High net worth individuals have to take steps to gain estate tax efficiency. This tax is only a factor for the wealthy because there is an exclusion that can be used to transfer a certain amount tax free.
In 2023, the exclusion is $12.92 million, but this record high exclusion is going to sunset at the end of 2025. If there are no changes in the meantime, the exclusion will go back to the $5.49 million that was in place in 2017 adjusted for inflation.
There are a number of different types of trusts that can be used to gain estate tax efficiency. These would include generation-skipping trusts, grantor retained annuity trusts, charitable lead trusts, and qualified personal residence trusts.
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