![]() ![]() How to Set Up a Trust: A Step-by-Step Guideġ. Many people who are trying to reduce their tax liabilities or avoid predatory creditors choose irrevocable trusts. It provides far less flexibility, but it is one of the best ways to avoid probate costs, estate taxes, and other financial liabilities, even from the income produced by the trust. You hand over control of the funds to a third party and cannot make changes to the terms of the trust after it has been established. The principal drawbacks of revocable trusts are that they do not necessarily avoid state taxes and, since you can access the funds, they are subject to regular taxation like any of your other assets.Īn irrevocable trust is set in stone once it is created. In most cases, a revocable trust turns into an irrevocable trust upon your death, assuming you are the grantor. Frequently called a “living trust,” it allows you to access your funds, make changes to your trust, add or take away beneficiaries, or dissolve your trust at your discretion. Irrevocable TrustsĪ revocable trust is exactly as its name implies: It can be revoked at any time. One of the most important factors when choosing a trust is whether you want to access and control the trust during your lifetime, so it is important to distinguish between two general types of trusts: revocable and irrevocable. The kind of trust you pick will depend on whom you choose as beneficiaries, when and how you want to distribute funds, and what kind of taxes or potential liabilities you want to protect your estate from. Qualified Terminable Interest Property TrustĪ qualified terminable interest property trust, or QTIP, works much like a standard marital trust, except you can choose additional beneficiaries to receive funds upon your spouse’s death rather than providing income only to a surviving spouse. Like an asset-protection trust, a spendthrift trust protects your money from your beneficiaries’ creditors until the funds are distributed. Sometimes beneficiaries have outstanding debts or financial liabilities that can put their future assets at risk. The recipient will also need to meet certain standards, such as qualifying for Medicare, to be considered “special needs.” You can learn more about those requirements on the Social Security Administration website. ![]() The beneficiary, however, must ensure they do not take distributions that would disqualify them from government help. Special needs trusts allow for beneficiaries who receive government benefits to benefit from the trust without taking away from their current state or federal subsidies. This is one of the most common types of trust, specifically designed to leave your estate to a surviving spouse. At the same time, it offers liquidity to the estate and, eventually, to the beneficiaries of the trust. Irrevocable Life Insurance TrustĪn irrevocable life insurance trust excludes life insurance proceeds from your taxable estate. Pro Tip: You are better off creating your own trust rather than relying on the courts to create one on your behalf, since you have no guarantee that the court will make a decision that reflects your intentions or the best interests of your beneficiaries. ![]() If you have documentation that you intend to leave certain assets or funds to a particular beneficiary, for example, then the courts can decide to grant a constructive trust to carry out your wishes. Constructive TrustĬonstructive trusts are not formal trusts created by a trustee, but rather implied trusts established via courts based on certain circumstances. In either case, once you are no longer receiving income or the trust has been dissolved, the remaining funds will go to charity. Charitable Remainder TrustĪ charitable remainder trust allows you to receive a set income for the duration of your life or until the termination of the trust. When you create a charitable lead trust, you decide that a certain portion of your assets will go to charity and the remaining assets will go to your beneficiaries. If you wait to set it up until after creditors have begun collections processes, it could be too late to make any transfers to your trust. Pro Tip: It is best to set up an asset-protection trust in anticipation of future creditor attacks. ![]()
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