How to Use a Trust to Protect Assets

Owning a large estate is a tremendous benefit to you and your family. However, it can also cause major burdens when you pass away. An estate tax can have a hefty cost and drastically decrease the financial well-being you worked so hard to build for your loved ones.

A trust will keep your assets safe after you pass away. However, it’s important to know how a trust works and know which type is best for you. Discover how to use a trust to protect assets in this guide from Tanko Law.

What Is a Trust?

A trust is an arrangement whereby a third party, called a trustee, holds assets on the behalf of a recipient, also called a beneficiary. There are many ways to arrange trusts, and the trustee can specify how and when assets pass to the beneficiary or beneficiaries.

Trusts usually avoid probate allowing the beneficiary access to assets sooner than if they were being transferred by a will. Because they are so versatile compared to other structures such as a will, they can prevent creditors from claiming the assets, whether it is a claim rising from a divorce or an accident on your personal property.

Regardless of the type of trust you choose, a trustee is responsible for managing specific assets for the recipient. Some trusts are revocable, meaning that they can be modified or canceled at any time. Other types are permanent once they are created, so choosing the right trust is essential.

Advantages of a Trust

Trusts have major financial advantages compared to bequeathing assets in wills. These include:

  • Making the conditions on when and how assets are distributed upon your death
  • Reducing gift and estate taxes
  • Efficiently distributing assets to beneficiaries without the delays and costs of probate court
  • Offering better asset protection from creditors and/or lawsuits
  • Allowing you to name a successor trustee, who manages the trust after your death and is empowered to handle the trust if you are unable to do so.=

Disadvantages of a Trust

Although they have many advantages, it’s worth noting that there are some disadvantages to trusts as well:

  • Taxes on trust funds are often higher than taxes that are owed on non-trust assets due to condensed marginal tax brackets
  • Trust funds can create beneficiaries who, should the need arise, cannot properly support themselves because they are accustomed to the lifestyle the trust gave them
  • To achieve the maximum exemption benefits from state taxes, an irrevocable trust has a loss of control that results from transferring assets

Three of the most popular types of trusts are the family trust, the generation-skipping trust and the qualified personal residence trust

Family Trust

In a family trust, also called a bypass trust, you make a will bequeathing the amount up to the estate-tax exemption to the trust. The remainder of the estate passes tax-free to your spouse. You’ll also specify exactly how the trust is to be used; for example, you may want to stipulate that trust income goes to your spouse after you die and that the trust principal is to be distributed tax-free to your children after your spouse dies.

Because your spouse is entitled to an estate-tax exemption as well, you and your spouse can, in effect, double the share of your children’s’ inheritance that can be shielded from estate taxes.

Once you place money in a bypass trust, it will always be exempt from the estate tax, even if the amount of money grows. So with wise investing on the part of your surviving spouse, he or she can significantly add to the amount of the children’s inheritance.

Generation-Skipping Trust

Also known as a dynasty trust, a generation-skipping trust allows you to transfer money tax-free to beneficiaries at least two generations younger than you. Usually, the recipients are grandchildren, though they can also be great-grandchildren. You may stipulate that your children are to receive income from this trust and that they may use the principal for things that help the beneficiaries, such as college tuition or bills.

There is an important detail to note with this type of trust, however. If you leave your children more than the amount of the exemption, this bequest becomes subject to a transfer tax. The transfer tax is independent from estate taxes, and it’s intended to prevent wealthy seniors from transferring all their money to their grandchildren.

Qualified Personal Residence Trust

A qualified personal residence trust (QPRT) removes the value of your home from your estate. It’s useful for a home that is going to appreciate in value. A QPRT allows you to give someone your home as a gift, usually your children, while allowing you to keep control of it for a length of time that you specify. If you choose, you may continue living in the home during that time, and you will maintain full control of it.

In assigning value to the gift, the IRS presumes your home is worth less than its current value, as the recipient won’t take possession of the house for years. However, there is a catch. If you do not outlive this trust, the IRS will count the full market value of the house when calculating your estate. To ensure that a QPRT is valid, you must outlive it, then either vacate the home or pay your children rent according to the fair market rent to continue living there.

Let Us Help You

At Tanko Law, our team of experienced attorneys has helped Montana residents with trusts since 1995. Visit our website for more information. Our attorneys will answer your questions and show you how to use a trust to protect your assets. Call us at (406) 257-3711 for a free consultation today.

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