There’s a lot of hype in the estate planning world about trusts and how a trust can be used to benefit both the individual who establishes it as well as the beneficiaries of a trust. Yet, for many people, there’s still a lot of confusion about what exactly a trust is and why, for many people in various situations, a trust is preferable to a will.
Key advantages of a trust include avoiding probate, reducing estate and gift taxes, greater control over how and when assets are distributed and protection against creditors and lawsuits. While these positive attributes apply to all trusts, there are various types of trusts from which an individual may select to accomplish specific estate planning goals.
With many estate planning matters, growing and being able to reap the fruits of one’s investments is a main goal. It can be disheartening, therefore, to learn that a significant percentage of an estate’s value must go towards paying required taxes. One way to avoid paying a portion or all estate taxes is to establish what’s known as a credit-shelter or family trust.
To accomplish this, an individual includes provisions in his or her will to leave “an amount to the trust up to the estate-tax exemption.” The remainder of an estate can then be passed directly to a spouse tax-free. An individual can also stipulate that the assets held in the trust or the income generated by the investments of the trust’s assets, are paid to a surviving spouse. Upon a spouse’s death, the remaining principle can be passed on to one’s children, again tax-free.
The main benefit of establishing a credit-shelter or family trust is to avoid paying estate taxes and to protect the financial security of one’s spouse with regard to long-term care, living and medical expenses.
In our next post, we’ll continue to discuss the different types of trusts and the benefits of each.
Source: CNN Money, “Estate planning: Types of trusts,” May 29, 2015