An Important Part of Your Estate Planning
Use of a trust can be an effective tool in your estate plan. It is
important to understand how a trust works prior to its implementation. A
trust is a document that is prepared by the grantor. A grantor is an
individual who transfers assets to the trust. When setting up the trust, the
grantor will also designate a trustee and beneficiaries of the trust.
The trustee that is appointed by the grantor will be in charge of managing all trust assets. The beneficiaries will be entitled to receive assets from the trust in accordance with the directions set forth by the grantor.
There are many different types of trust. Regardless of the type of trust, there are two main categories; revocable and irrevocable:
- A revocable trust can be changed, modified or terminated at any point in time.
- An irrevocable trust cannot be terminated after it is established.
- There are tax advantages to establishing an irrevocable trust.
Your Trust and Life Insurance
The use of a trust in an estate plan can be a very helpful tool with respect to life insurance. An irrevocable life insurance trust helps in reducing taxes and limiting a decedent's probate estate. An inter vivos revocable trust is also useful in distributing out of state property. A testamentary trust is the most commonly used. This is a trust that is established in the Last Will and Testament. The trust is unfunded until the decedent passes away. This trust is commonly used by parents who have young children. If properly established, the trust will prevent the minor children from receiving money or distributions until they are responsible enough to manage the same.
The popularity of trusts is somewhat cyclical. There is a great deal of misinformation concerning their benefits. For example, some organizations will indicate that the use of a revocable living trust avoids obligations under the Pennsylvania Inheritance Tax.
Unfortunately, the use of a revocable trust does not reduce or eliminate the inheritance tax obligation for assets held by the trust.
It is very important to make certain that you understand both the benefits of having a trust as well as the additional fees and costs that will be incurred after one is established.