Estate planning is a crucial part of anyone’s lifetime. People tend to underestimate estate planning as it may seem like a difficult and inconvenient process. What many people don’t understand is that a lack of proper estate planning can cause more difficult repercussions once they or their loved ones have perished, regardless of the amount of wealth—or the lack of it—you accumulated in your lifetime.
In a survey conducted by Caring.com, the number of people who engage in real estate planning has significantly decreased, with 42% of individuals having a will in 2017 dropping into 32% in 2024. Apparently, estate planning costs and lack of education were the main reasons many people chose to neglect estate planning.
Trust vs. Will: They’re Not the Same?
Trusts and wills are two asset planning tools that people often associate with estate planning. While many are educated about wills, the trust is an oft left-out subject worth looking into. Compared to a will that’s only activated upon an individual’s death, a trust permits estate transfer to a third party while the trustor is still living.
Having both a trust and a will is imperative to a smooth and hassle-free asset transfer to your beneficiaries. Whether you’re only getting one of them or both, it’s crucial to seek legal and professional guidance when writing up a trust or a will.
What is a Trust?
A trust is a formal agreement demonstrated in a fiduciary relationship between a trustor and its trustee. The trustor, the individual who owns the assets and properties subjected to the trust, gives the trustee or beneficiary the right to hold the title to their assets and properties.
Trustors can arrange their trust at any time of their lives in any way they find it convenient. Because of final will and testaments, many people forget, let alone recognize, that a trust agreement is as important.
Other Types of Trust You May Not Know About
Trusts are categorized into six main categories: revocable and irrevocable trusts, living and testamentary trusts, and funded and unfunded trusts. Since these classifications are already acknowledged in the estate planning landscape, we’re going to touch more on some subtypes that many people are confused about.
Trust commonly involves a trustor’s assets, including money, business, property, stocks and bonds, and other asset and investments. But, did you know that trust funds can also hold your weapons and firearms? According to Mile High Estate Planning, a gun trust is a vital aspect of an estate plan which suits gun owners and collectors best.
A gun trust is a revocable trust, meaning the grantor can void the trust agreement at any time before the trustor’s death. By arranging a gun trust for your chosen beneficiaries, they’ll be able to own your firearms without legal difficulty after your death, and it’ll protect them in the event of breaking the law due to gun use.
Meanwhile, a Totten trust involves passing your bank account ownership to your beneficiaries. Setting up a Totten trust is an efficient and seamless method of transferring money, kept in a bank account called the payable-on-death (POD) bank account, without having the beneficiary face probate.
Arranging a Totten trust is relatively easy. The trustor should fill out and sign paperwork issued by the bank where the savings or checking account is kept, then name the POD beneficiary. However, a Totten trust is revocable, allowing the grantor to perform any changes to the assigned beneficiaries and their agreement.
This next type of trust is different from the first two as it’s irrevocable. If you want to set up a trust not only for your known beneficiaries but also a charitable foundation, you should look into setting up a charitable trust. According to your designated period, the foundation will hold your assigned assets, along with interest produced by the assets.
Charitable trusts are further divided into two types:
- Remainder Trust: You can opt to receive income from your non-income-producing assets, as well as gain a charitable donation tax deduction from the remainder of these assets.
- Lead Trust: On another end, you will allocate a portion of your assets to the charity while you obtain a charitable donation tax deduction according to your proceeds. Then, the remaining funds from the principal will go to your named beneficiaries.
As its name implies, a blind trust is a type of trust granting the trustee to have full control of the trustor’s assets. In short, the trustee also has a role in managing the assets, even the flowing income generated in the trust, while the trustor manages alongside them. Blind trusts can either be revocable or irrevocable.
A blind trust works differently than an ordinary trust agreement. While a typical trust allows both parties to inform one another about the trust funds and holdings, a blind trust doesn’t let the trustor and beneficiaries be in contact to discuss anything related to managing the assets and investments. You can learn more about establishing a blind trust here.
Building wealth is a difficult journey that typically takes years. Imagine accumulating your wealth through many financial hardships, only to pass them into your financially irresponsible heirs. Setting up a spendthrift thrust is your best way to protect your spendthrift beneficiaries from themselves.
In a spendthrift trust, your beneficiaries don’t have direct access to your assets, thus protecting and preserving the wealth to your heirs. An ordinary trust stops operating once the trustor dies, but a spendthrift trust runs from its inception and even past the trustor’s lifetime.
A bypass trust is explicitly made for married couples. In case one spouse passes away, the bypass trust will take over to help the remaining spouse bypass estate taxes generated on specific assets.
A bypass trust is also called the AB trust, as the trust separates the couple’s assets into two separate trusts: the ‘A’ trust, or marital trust; and the ‘B’ trust, which is the bypass or family trust. The marital or ‘A’ trust is revocable, while the ‘B’ trust remains irrevocable.
Take note that a bypass trust can be time-consuming, expensive, and demanding, as you’ll need to find a legal expert specializing in bypass trusts. If you and your spouse don’t own any substantial, extensive assets, you might want to reconsider avoiding the bypass trust.
During a person’s lifetime, estate management and planning are as essential as financial planning. While you’re generating cash inflow, increasing net worth, and building your wealth, unfortunately, you can’t bring all these assets to your grave. Through preparing for the inevitable, you’re doing a favor for yourself by choosing the right type of trust for your assets and investments, and ensure that they’ll be preserved and spent under responsible hands.