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What is a Trust? And Other Common Estate Planning Questions

Financial Planning, retirement, estate planning Aug 3rd, 2020 by: Darryl Lyons

When do you need a financial planner? Ask yourself these 3 questions:

  • Will I outlive my money in retirement?
  • Am I doing everything I can now to ensure I live comfortably when I’m no longer working?
  • Will my assets go to my loved ones when I’m gone?

If you can answer these questions comfortably and confidently, you may not need a financial planner. If you can’t, it’s wise to work with someone who can.

At PAX Financial Group, we help clients with all of their financial planning needs. This often means working in conjunction with clients’ tax and legal advisors to make sure their estate plans align with their financial goals. In this process, we’re often asked about wills and trusts. What’s the difference? What are the pros and cons to each? What is best for me?

We host advanced estate planning workshops to help clear up some of the confusion. Below are 5 of the most common questions we get about trusts – and the answers.

 

What Exactly Is a Trust?

In short, a trust is a legal or fiduciary arrangement, managed by someone (known as a trustee) on behalf of someone else who benefits from the trust (known as a beneficiary) for the creator of the trust (known as a grantor or settlor). A trust is an important tool implemented as part of many estate plans. It may be set up in addition to a will or in place of one.

A trust is like a will, in that it’s a way to pass assets, such as real estate, investments, life insurance policies and bank accounts, to one or more beneficiaries, often family members, close friends or even charitable organizations. However, a will can establish things like custody and guardianship that a trust cannot, so people often set up trusts as part of an estate plan that also includes a will.

 

What are the Benefits of a Trust?

Trusts offer a number of benefits, both for the person who establishes the trust, and for the beneficiaries.

Trusts are usually not subject to the same probate process as wills, which can be long and arduous. What this means is that your assets may be transferred to your beneficiaries more quickly, with potentially fewer court costs and less estate taxes.

In addition, trusts offer privacy that wills do not. Because a will must go through the probate process in court, it becomes a matter of public record. This means anyone who requests to see the will can see your assets, liabilities, and names and addresses of your heirs and the executor of your will. A trust, on the other hand, does not have to go through probate court, so it doesn’t become a matter of public record.

With a trust, you also have more specific control over the distribution of your assets: You decide who gets what, and precisely when. For example, you can designate that your children will receive a certain amount when they reach a certain age. You can even establish a plan that outlines how your personal or business assets will be managed in the event that you become incapacitated.

(If you’re the beneficiary of a will or trust, read our recent blog post: How to Navigate Sudden Wealth … And How Not To).

 

It's never too soon to start planning for the future. Contact PAX Financial Group to see how we can help.

 

What Types of Trusts are There?

There are many different types of trusts you can set up, and which one you decide to establish depends on your financial situation and goals.

 

Revocable Vs. Irrevocable 

The biggest difference between revocable and irrevocable trusts is flexibility. As its name suggests, with a revocable trust, you have the option to make changes, or “revoke” the trust. In this case, the ownership of assets would revert to the grantor. Revocable trusts are also known as “living trusts,” and if the grantor passes away, a revocable trust automatically becomes irrevocable.

With an irrevocable trust, once established, you are unable to modify or undo it. An irrevocable trust would be used to remove certain assets from your estate, thereby minimizing tax liability, or creating a “safe haven” for certain assets, protecting them from creditors.

 

Family Trusts

A family trust is established to benefit relatives of the grantor, either by blood, marriage or adoption.

 

Charitable Trusts

Not surprisingly, the beneficiary of a charitable trust is a charitable organization. There are two types of charitable trusts: A charitable lead trust and a charitable remainder trust. These are irrevocable trusts that may offer the grantor immediate income tax deductions.

  • A charitable lead trust is formed when a donor signs over assets that a charity will receive after his or her death.
  • A charitable remainder trust provides you with income from the assets during a predetermined period of time, with the remaining assets or income going to the designated charity.

 

Special Needs Trusts

A special needs trust is established to provide for someone with physical or mental disabilities who is unable to manage his or her own finances. This type of trust takes into consideration the future lifestyle needs and requirements of the beneficiary and helps protect the beneficiary’s continued eligibility for government benefits, such as Medicaid and subsidized housing. The trustee is most often a close, trusted family member.

 

Generation-Skipping Trusts

With a generation-skipping trust, the grantor leaves his or her assets to grandchildren (or another beneficiary who is at least 37-½ years younger than the grantor), bypassing the grantor’s own children and thereby avoiding the estate taxes the assets would be subject to if transferred directly to the grantor’s children.

 

Life Insurance Trusts

Because you don’t actually own the funds that would be paid out as part of your life insurance policy, a life insurance trust takes ownership of the policy so that the payout is not included in your estate, which reduces (or may even eliminate) your estate’s tax liability, and increases the amount your beneficiaries will get to keep.

 

How Does Medicaid Affect a Trust?

Medicaid has outlined specific guidelines to determine what assets will affect a beneficiary’s eligibility to qualify for Medicaid. This depends on whether the trust is revocable or irrevocable, and who set up the trust. Medicaid trust laws and requirements vary by state.

Discuss your specific situation, needs, goals and concerns with a financial and legal advisor so you fully understand your options.

 

What Type of Trust is Right for You?

There are many options when it comes to estate planning, which can make this process complex. Above is an overview how a trust can benefit you, but it’s not a comprehensive list of the types of trusts you can establish.

To determine the right option for you, talk with a financial and legal advisor. Estate planning laws and requirements change often. And the wrong decision can have long-lasting effects for your beneficiaries.

When do you need a financial planner? When a financial decision can negatively impact your loved ones, working with a financial planner can help you make an informed decision.

If you’re not currently working with a financial advisor or are ready for a second opinion, contact us. PAX Financial Group is here to help.

Retirement Guide - PAX Financial

This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.

Darryl Lyons

Darryl Lyons

CEO and co-founder of the PAX Financial Group, Darryl Lyons has been a licensed professional in the financial services industry since 1999. A lifelong Texan, Darryl began his career in the financial sector just one day removed from earning his bachelor’s degree in corporate financial management and accounting at St. Mary’s University. Throughout his career, he has won awards for recruiting and development from Fortune 100 companies. In January 2007, he chose to begin and develop his independent practice. He joined Andres Gutierrez and Joseph Schuetze to form the PAX Financial Group. Darryl also served as the Chairman for Brooks Development Authority. Shortly after his service, Mayor Julian Castro, named a park “The Darryl W Lyons Park” in honor of his service. He was named to the 2010 San Antonio Business Journal’s “40 Under 40 Rising Stars,” which honors people making a difference in business and in the community.