Creating a trust as part of your estate planning has several benefits. For one thing, assets in a trust account might not have to go through the probate process. For another, a trust can help reduce estate taxes. Putting things into a trust also helps ensure your wishes will be followed regarding the use of your assets. The things you put in a trust and when you do so depends on the nature of the assets and what you want to accomplish.
Funding a Trust
A trust is a legal entity that owns assets on behalf of one or more beneficiaries. You can set up a living trust while you are alive and name yourself as trustee so you retain control of the things you put into the trust during your lifetime. Alternatively, you can use your will to create a testamentary trust. This type of trust is established and funded according to instructions in your will. You can put almost any sort of property into a trust account. When you put things into a living trust, they do not have to be probated. However, you should not put IRAs into a trust. This will conflict with Internal Revenue Service rules. As a result, the money in the IRA immediately becomes taxable income and you might be subject to a penalty tax as well.
Life insurance is one thing that is typically put into a trust account. For life insurance policies, you need to set up an irrevocable trust specifically for this purpose. An irrevocable trust is one that cannot be changed once it is created. You transfer ownership of the life insurance policy to the trust account. Once you do, you can no longer borrow against the cash value of the policy. However, the proceeds from the policy can be used to pay estate expenses. The benefits paid by the policy can also be distributed to your heirs tax-free.
Assets in General
When you put things into a revocable living trust and you name yourself as trustee, you have the option of removing them or changing the terms of the trust. Typically, people put items with considerable value into trust accounts to minimize probate fees and maximize any tax advantages offered by the trust. For example, you can include real estate, artwork and expensive jewelry. Your ownership share of a small business can be transferred to a trust account. You can also put cash and securities such as stocks and bonds into a trust.
Trusts as Beneficiaries
It isn’t convenient to put some things into a trust account. For instance, you might want to keep your checking and savings accounts in your own name. As noted above, putting an IRA into a trust has adverse tax consequences. In many cases you can name the trust as a beneficiary. You can do this with accounts at banks and brokerage firms, and with IRAs as well. Ownership of the assets pass automatically to the trust account when you pass away, without the need for probate. Your successor trustee administers the assets according to the instructions you have provided.