For those who don't have a high net-worth but wish to leave money to children or grandchildren and control how that money is used, a trust may be right for you; it's not just available to high-net-worth individuals, and it offers a way for trustors to protect their assets long after they pass on.
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Trust Funds If you've heard of trust funds but don't know what they are or how they work, you're not alone. Key Takeaways Trust funds are designed to allow a person's money to continue to be useful well after they pass away.
You can place cash, stock, real estate, or other valuable assets in your trust. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. For many people, the topic of Estate Planning seems daunting, overwhelming and confusing. Our in-depth look at all the types of Trusts available will help you get started. First, you should understand the basic characteristics and parts of a Trust:.
Revocable vs Irrevocable Trusts. Testamentary Trusts. Special Needs Trusts. Asset Protection Trusts. Credit shelter Trusts. A Revocable Trust also sometimes referred to as a Living Trust is a Trust that can be changed or revoked for any reason, at any time, as long as the Grantor is still living and deemed mentally competent. An Irrevocable Trust cannot be changed without all of the beneficiaries consenting first.
At first glance, it may seem that Irrevocable Trusts are never a good idea, but in certain instances, they can actually be quite beneficial. Most people who set up Irrevocable Trusts do so for tax considerations.
Additionally, as they can protect from lawsuits and creditors, Irrevocable Trusts can be wise for those who have a particularly litigious profession, like doctors or lawyers. A Living Trust is really just another name for a Revocable Trust. This would be a good type of Trust for a married couple. Your Last Will and Testament explains how, at the right time, the actual Trust should be created.
A Charitable Trust is exactly what it sounds like - a Trust set up to benefit a charitable organization. This is another one of the types of Irrevocable Trusts available, and can offer some tax benefits while still generating income. When you set up a Charitable Trust, you appoint an organization to be Trustee. Generation-skipping trusts: A trust in which you transfer money to grandchildren or other people who are at least This is a complicated area of the tax code, so be sure to consult with a qualified professional.
Here are a few things to keep in mind:. Estate taxes. If you have a large estate, you may owe federal estate tax when you die. Also, some states have their own estate taxes and set their own estate size thresholds , so there could be two estate tax bills to pay: one to the federal government and one to the state. Inheritance taxes. Some states have inheritance taxes , which are different from estate tax. The people who inherit the money pay the tax. Income taxes. The assets in a trust might generate income, which could trigger income taxes or capital gains taxes.
Who pays that tax depends on who legally owns the assets. If a charity gets the income directly, that donation might qualify for a tax deduction. Time and effort. You may have some extra paperwork to do at tax time because trusts sometimes have to file their own tax returns. There are three ways to go, in general. Hire a financial professional. Fees can vary widely, but professional guidance is often worth it. Services like Zoe Financial , Harness Wealth and Facet Wealth can connect you with a financial advisor to walk you through the process.
They may be a low-cost option, but you may pay in time and effort. Do it through work. Some companies offer discounted estate planning services as part of their employee benefits packages. This article is meant to provide background information and should not be considered legal guidance. What is a trust? How trusts work in simple terms. Trusts have three main players:. Advantages of a trust.
Disadvantages of a trust.
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