What type of trust will best meet your needs? Explore some of your options here.
A trust can help protect your assets, guard your privacy, minimize family conflict, and help ensure that your assets are distributed according to your wishes. While many people think of trusts as only for the wealthy, trusts can be a powerful estate planning tool with potential non-financial benefits, says Maurice E. Quiroga, senior vice president–senior trust advisor for Wells Fargo Bank within the Wealth & Investment Management division.
With so many types of trusts covering various wealth planning strategies, it can be difficult to determine which will best fit your needs. Here, Quiroga and Bruce Stone, senior vice president–senior trust advisor for Wells Fargo Bank within the Wealth & Investment Management division, share important information on one of the most common types of trusts, plus four others that might address a specific need — and help you make the right decision for your estate plan.
Revocable Living Trust
Gives you control over how and when your assets are distributed when you die or become incapacitated
This is a very common type of trust, and Quiroga says the potential benefits to your estate plan are not limited to those with high net worth. A revocable trust keeps the assets it contains out of probate (a court-supervised process that verifies the will’s authenticity, pays off any outstanding bills, and distributes the estate’s assets) and allows you to spell out exactly how you want them to be managed and distributed in the event of your incapacity or upon your death.
It’s called “revocable” because it can be changed by the grantor at any time. “If there’s a change in your family situation — divorce, birth of grandkids, sale of a business, loss of a family member, tax law changes — you have the flexibility to amend your document,” Quiroga says.
How it works: With the help of your estate planning attorney, you create the trust, fund it with assets, and typically name yourself as trustee (the person who will manage the trust). You also name beneficiaries and a successor trustee who will manage your affairs, according to the terms you included in the trust, if you become incapacitated or die. For example, you could stipulate that each of your children will get a specific stipend from the trust’s income every month but will have access to the principal only for higher-education costs or a health care emergency.
“You can decide the level of controlling provisions in the governing document,” Quiroga says. For example, you could stipulate that each of your children will get a specific stipend from the trust’s income every month but will have access to the principal only for higher-education costs or a health care emergency.
“Forgetting to fund a trust is one of the most common mistakes I see,” Quiroga says. Seeking the assistance of a tax advisor can help you determine which assets should be funded in the living trust and coordinate beneficiary designations for those assets that pass outside the trust — for example, life insurance or retirement accounts. “A best practice is to retitle your assets in the name of the trust after it is created and when new assets are purchased.”
Other types of trusts
While revocable living trusts are flexible tools in many wealth transfer plans, those with specific needs may want to explore other types of trusts that may align with their particular situation. Talk to your estate planning attorney and trust advisor about whether any of these would be a good fit for you.
Marital Qualified Terminable Interest Property (QTIP) Trust
Provides for your spouse after your death while protecting your assets for future generations
Not every surviving spouse has the time, knowledge, or interest in managing the family finances. One of the various solutions may be to establish a marital qualified terminable interest property trust. You can set up this trust, often referred to as a QTIP, to help ensure that your surviving spouse is taken care of for the rest of their life. Income generated from the trust, and sometimes principal, is distributed to the spouse, but the grantor determines how the trust assets are distributed after the surviving spouse dies. Trustees are responsible for managing trusts and administering the assets in an impartial manner that aligns to the objectives of the trust while also protecting the best interests of the named beneficiaries.
QTIPs may be a good option if you’ve been married before and want to provide for your current spouse during their lifetime while also leaving an inheritance from the remainder of the trust for your children. When setting up a QTIP, your tax advisor can be a good resource to help you determine whether this strategy can help lower estate taxes (and some capital gains taxes) if those are a concern.
Special Needs/Supplemental Needs Trust
Provides for a child or sibling living with a disability without jeopardizing their government benefits
If you have a child with special needs, you want to make sure there’s enough money to provide lifetime care. But if you leave money or property directly to the child with special needs, they must report it as a financial resource, which puts them at the risk of losing government benefits such as Social Security and Medicaid. A special needs trust allows you to allocate funds from a personal injury settlement, gifts, life insurance, or an inheritance into the trust without discontinuing public support.
Irrevocable Life Insurance Trust (ILIT)
Helps keep a life insurance payout from triggering estate taxes
The estate tax limit is indexed for inflation; as of January 1, 2023, the limit is $12.92 million per taxpayer (and twice that amount for married couples), but the limit currently is scheduled to drop back to about $5 million (adjusted for inflation) per taxpayer in 2026 — and you never know for sure what it will be when you pass away, says Stone.
If you’re worried that proceeds from a life insurance policy could push the value of your estate over the estate tax limit, you can set up an ILIT to own your life insurance policy and keep the proceeds out of your estate when you die. The trust can purchase the policy directly, or you can transfer ownership of an existing policy into your ILIT, Stone says. However, he notes that there is a three-year look back period if you do decide to do a transfer. You should also consult with your tax advisor regarding any potential gift tax impacts of transferring a policy into an ILIT or transferring money into the ILIT to purchase a policy.
Helps you make tax-efficient contributions to charity while still providing for your heirs
Those interested in giving back may look to trusts to help preserve their wealth while giving to charity. According to Stone, two common charitable trusts are a charitable remainder trust and a charitable lead trust. Each offers the option to be set up during life or established as part of an estate plan to take effect after you pass away.
If you have an asset with significant taxable appreciation, you can put it in a charitable remainder trust. The trust then has the potential to generate a stream of income that you can direct to one or more beneficiaries. At the end of a specified period or when the beneficiary dies, the remaining assets are donated to the charity or charities of your choice. So, for example, you could set one up at your death that pays out annual payments to your children for 20 years; after that time, whatever is left would go to charity. A charitable lead trust is almost the opposite, Stone says. In the scenario above, the payments would go to the charity and the remainder to beneficiaries.
Plans for transferring wealth are personal and unique, and these are just some of your options. Be sure to align your decisions with your long-term goals. Now is a good time to discuss with your advisors at Wells Fargo Wealth & Investment Management considerations and strategies that may offer long-term planning benefits independent of short-term tax impacts.
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Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
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