Choosing the Ideal Trust for Your Wishes
The term estate may bring to mind mansions, vast fortunes, and a level of wealth that many
people do not possess. This misconception may lead to the false impression that estate
planning is only for the rich and famous, discouraging those with more modest means from
seeking professional guidance.
If estate is a loaded term, then trust is even more so. Mention the word trust, and many people
think of wealthy families, complex legal arrangements, and a level of sophistication that can
seem intimidating or unnecessary.
Misconceptions about trusts often stem from a lack of understanding about what a trust actually
is, how it works, and situations where it can provide benefits above and beyond a will. Wills and
trusts are complementary - not mutually exclusive. They can serve different roles in an estate
plan and often address different concerns.
Trust Basics
Trusts can work in various ways depending on the type of trust and how you want to pass down
your assets (accounts and property). However, every trust has some things in common.
When you transfer assets to a trust, the trust becomes the legal owner of those assets. You are,
in effect, giving up direct ownership of whatever assets you place in a trust, which can include
real estate, bank and financial accounts, personal property, and even things such as life
insurance proceeds and business interests.
- As the trustmaker (sometimes called the trustor, settlor, or grantor), you create the trust
and decide which asset(s) to put into it.
- A trustee (or co-trustees) manages the trust on your beneficiaries' behalf. Depending on
the type of trust you create, you might be the initial trustee.
- Your beneficiaries receive proceeds from the trust based on instructions you leave the
trustee in the trust agreement. You can give the trustee wide discretion to manage
assets or prescribe very narrow parameters. Depending on the type of trust, you might
also be the beneficiary while you are alive.
Although a will can also be used to name beneficiaries to receive your assets, it takes effect
only after you die. A trust, on the other hand, is effective during your lifetime, which means that
a successor (backup) trustee can step in to manage your assets if you become disabled or
injured - not just when you pass away, as with a will.
People create trusts for numerous reasons. Some of the most common are the following:
- Avoiding probate. The court process known as probate imposes additional costs,
delays distributions, and is part of the public record. Assets held in a trust avoid probate.
They pass directly - and, in most situations, privately - to beneficiaries according to the
instructions you have included in the trust agreement.
- Reducing estate taxes. If your net worth exceeds exemption amounts for estate and
inheritance taxes, certain types of trusts can help minimize your tax liability, leaving
more money to benefit your loved ones.
- Protecting assets. Trusts can shield assets from the beneficiary's creditors, lawsuits,
and potential financial mismanagement.
- Providing for loved ones. Trusts can ensure that loved ones, such as minor children or
those with special needs, are cared for according to your wishes.
- Managing assets during incapacity. A trust allows for the seamless management of
assets if you become incapacitated (unable to manage your affairs), ensuring estate
plan continuity and avoiding potential court intervention.
- Charitable giving. Trusts can be used to support charitable causes and provide
associated tax benefits.
- Incentivizing behavior. You could structure a trust to encourage beneficiaries to
achieve certain goals, such as pursuing education or maintaining employment.
Demand for trusts is increasing as Americans go through the "Great Wealth Transfer" from older
generations to younger family members.1 Ultimately, the decision to create a trust reflects a
desire for greater control, protection, and flexibility in managing and passing down wealth.
Trust-Based Planning Scenarios
Understanding how trusts work can help you properly visualize how a trust might fit into your
own estate plan. To further illustrate the variety of roles trusts can play in achieving your legacy
goals, here are some specific examples of scenarios where trusts are commonly utilized:
- You have a high net worth (specifically, a net worth exceeding the federal estate tax
exemption, or state exemption levels, which are as low as $1 million in Oregon and even
lower in some states that impose an inheritance tax). If these taxes affect you, consider
- a grantor retained annuity trust - allows you to transfer assets to beneficiaries
while retaining an income stream;
- a charitable remainder trust - provides an income stream to beneficiaries, with
the remainder going to a designated charity; or
- a dynasty trust - passes wealth down through multiple generations.
- You want complex distribution instructions, which could involve blended families,
beneficiaries with special needs, or beneficiaries who are prone to financial
mismanagement or vulnerable to creditors. These scenarios may lend themselves to
- a spendthrift trust - protects assets from creditors and prevents beneficiaries
from squandering their inheritance;
- a supplemental needs trust - enables a disabled beneficiary to receive financial
support from the trust without affecting their eligibility for means-tested
government benefits;
- an incentive trust - makes distributions to a beneficiary dependent on their
meeting certain conditions, such as graduating, becoming employed, getting
sober, or volunteering for charitable causes; or
- a qualified terminable interest property trust - provides for a surviving spouse
while ensuring that the deceased spouse's assets ultimately pass to their chosen
beneficiaries when the surviving spouse dies.
- You are exposed to unique tax liabilities related to situations such as having
extensive real estate investments or business ownership. Possible trust solutions include
the following:
- a qualified personal residence trust - allows for the transfer of a primary
residence or, in some circumstances, a vacation home, to a trust while retaining
the right to live in it for a set period or
- an irrevocable life insurance trust - holds a life insurance policy that uses the
death benefit proceeds to cover estate taxes or provide liquidity to a business
after your death.
Estate planning attorneys often emphasize that every adult, no matter their age or wealth level,
needs an estate plan. It should start with a will, but depending on your financial and family
situation, a trust can be a valuable addition to your plan.
If you think a trust may be right for you and your family but are overwhelmed by the number of
options and their range of uses, set up a time to talk with us about the different trust types and
the benefits they offer.
MEREDITH | PC
4325 Windsor Centre Trail
Suite 400
Flower Mound Texas 75028
214-513-1013
This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional Counselors to evaluate or pursue tax, accounting, financial, or legal planning strategies.
You have received this newsletter because I believe you will find its content valuable. Please feel free to Contact Me if you have any questions about this or any matters relating to estate planning.
