Trust Basics for Estate Planning

Trust Basics for Estate Planning

Trusts are legal systems through which you or someone you love benefits from your assets but doesn't technically own them. Like some corporations, trusts are paper entities that have the ability to own property. When you place your assets in trusts, you no longer actually own them. The trust to which you have assigned them does.

Example: You have a neighbor, a small-business owner named John Jones. Mr. Jones drives a 2008 Honda Accord. You assume it's his car. But you're wrong. The car technically belongs to his company, John Jones Inc. For whatever reason (probably for tax purposes), Mr. Jones decided that it made more sense for his company to own the car than for him, personally, to do so.

This doesn't mean that Mr. Jones can't drive the car. You see him riding around all the time. He takes it to and from work and business appointments. He uses it to drop the kids off at soccer practice and to take his wife to their favorite restaurant on their "date nights." He just doesn't, technically, own it.

Trusts often serve as sound estate-planning tools. They can help reduce your estate-tax levy. And, since they bypass probate, they make for an easy transfer of assets from you to your heirs. Charitable trusts can even help lower your income tax payments.

Revocable vs. irrevocable trusts
Trusts fall into one of two broad categories: revocable and irrevocable. Any revocable trust you establish can be changed or rescinded during your lifetime. An irrevocable trust--such as a life-insurance trust--can't be altered once you have put it in place.

Why would you want to revoke a trust?
There are many reasons why you might want to revoke a trust. Life situations change often. You may set up an A/B trust to benefit your spouse after your death. But what if you divorce? You'd clearly want to revoke that trust.

In fact, you'd probably like the ability to change your mind as often as you like and revoke any trust you implement. But some trusts--notably life-insurance trusts and charitable trusts--have been deemed irrevocable by federal and local governments. Why? They provide substantial tax breaks for their beneficiaries. Governments don't want you taking advantage of these tax savings then saying, "No no no, I changed my mind, and I'm revoking the trust."

Because you can't alter irrevocable trusts once they have been put in force, you want to talk to an estate lawyer about the ramifications of putting your assets into a trust.