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The Following Is For Educational Purposes Only
Invest Wisely: Trusts
When should I set up a trust? Do I need one at all?
It depends on the size of your estate and the purpose of the trust. For example, if you mainly want a living trust to protect assets from taxes and probate but your estate is under the current federal tax floor ($675,000 for 2001) and small enough to qualify for quick and inexpensive probate in your state, some lawyers would tell you it isn’t worth the cost. However, a trust can do a number of things a will can’t do as well unless the will establishes a trust or pours over into a trust. If you want to avoid a court hearing if you become incompetent or unable to provide for yourself, or if you want to provide for grandchildren, minor children, or relatives with a disability that makes it difficult for them to manage money, a trust has many advantages. If you have a trust, your trustee can manage assets efficiently if you should die and your beneficiaries are minor children or others not up to the responsibility of handling the estate. And a trust can protect your privacy; unlike a will, a trust is confidential.
How do I decide which type of trust to use?
Two basic kinds of trust exist: revocable and irrevocable. Revocable trusts can be changed or even canceled any time after they are established. For this reason, they do not remove assets from a grantor's estate; the government considers those assets as being under the grantor's control. With a revocable trust, you must pay income taxes on revenue generated by the trust, and those assets remaining at your death may be subject to estate taxes.
Be absolutely sure of your decision before going ahead with an irrevocable trust. Irrevocable trusts cannot be altered or canceled once they are established. The assets placed into an irrevocable trust are permanently removed from your estate and transferred to the trust. The trust becomes a separate taxable entity that pays taxes on the income and capital gains it generates. Therefore, when you die, the appreciation of those assets is not considered part of your estate and thus avoids estate taxes.
What is an irrevocable trust and what are its tax advantages?
When you create a trust, you decide whether the trust will be revocable or irrevocable. A revocable trust can be changed or even dissolved by you at any time. An irrevocable trust, however, can never be changed. The assets you put into it must stay there. Beneficiaries cannot be added or deleted. And the only way to change the trustee is for that person to die or agree to resign. Why, then, choose to make your trust irrevocable? For tax advantages. An irrevocable trust or the beneficiary of the trust pays the income taxes on what its assets earn. When you die, the trust property is not part of your estate and will not be subject to death taxes. Conversely, revocable trusts offer no tax benefits at all. If you want lots of flexibility, make your trust revocable. But if you want tax breaks, you must forgo flexibility and form an irrevocable trust instead. -- Kenneth J. Strauss
In regards to a trust, what is a settlor?
The settlor of a trust is the person who actually creates the trust. In other words, if you created a trust, you would be considered the settlor. Other terms synonymous with settlor include trustor, creator, grantor and trust maker. The settlor not only sets up the trust, but also names the beneficiaries. Other responsibilities include naming the trustees and choosing which property will be transferred to the trust.
What is a spendthrift clause in a trust?
Many types of trusts include a spendthrift clause. It's a provision that can prevent trust funds from being paid to anyone other than the trust's beneficiary. Including a spendthrift clause in a trust can, for example, prevent a greedy brother-in-law from getting his hands on assets that you left for your sister. In many cases, it can also keep the trust's assets away from creditors.
How can I use trusts to make sure my beneficiaries use their inheritance wisely?
To insure that an inheritance is used wisely, set up a trust in your will (called a testamentary trust). Trusts are popular among people with beneficiaries who aren’t able to manage property well. This includes elderly beneficiaries with special needs or a relative who may be untrustworthy with money. It may be a good idea to require such beneficiaries to obtain money from a trustee who would exercise discretion about how to distribute it, instead of giving the money outright in your will. A discretionary trust gives the trustee leeway to give the beneficiary as much or little as he or she thinks appropriate. Another type of trust is a spendthrift trust. It’s simply a trust in which your instructions to the trustee carefully control how much money is released from the trust and at what intervals, so you can keep an irresponsible beneficiary from getting thousands of dollars in one stroke.
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