Probate is a costly and sometimes lengthy procedure wherein a court oversees the distribution of property to a decedent’s heirs. During probate, courts can freeze assets until the process is completed. Probate also risks a loss of privacy, because court records are open to the public. Perhaps the biggest drawback is the price tag — probate costs can eat up 4% to 5% of the total value of an estate, depending on its size, complexity, and the state in which probate occurs.1
One way to help shield assets from probate is by placing them in a trust. As you’ll see, trusts offer other benefits as well.
Meet the Key Players
Although trusts involve a complex web of tax rules and regulations, the concept behind them is fairly simple. The grantor places ownership of his or her assets in the trust, which holds the property for the benefit of the beneficiaries. The trust is typically overseen by a trustee who must distribute the assets based on instructions outlined in the trust. Even though a trust is a legal document, it enjoys a level of privacy not available with a will because it may never see the inside of a courtroom.
There are several types of trusts, but most fit into one of two categories.
Revocable trusts allow the grantor to modify the terms, add or remove assets, and even revoke the trust entirely during the grantor’s lifetime, after which the trust becomes irrevocable. This type of flexibility is popular for grantors who want to control how their assets are managed and distributed. Revocable trusts can be used to place limits and conditions on beneficiaries, help married couples segregate community assets from individual assets, and establish rules and guidelines for management of the trust assets during and after the grantor’s lifetime.
Irrevocable trusts don’t offer the same flexibility, but they excel when it comes to reducing exposure to creditor claims and estate taxes. The grantor is essentially required to surrender control of any assets that are placed in the trust. Transferring ownership of assets to the trust means they are no longer considered part of the grantor’s estate. Although the grantor can specify how the assets will be distributed, he or she is generally prohibited from benefiting from the trust assets once they are in the trust.
A properly structured trust can be a valuable estate conservation tool, but it is not something you should set up yourself. Before implementing any trust strategies, you should consider the counsel of an experienced estate planning professional.
1) 2010 Field Guide, National Underwriter
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.
