Halsey Schreier, Contributor
Sept. 7, 2022
For many families, trusts can be a useful vehicle for passing wealth to the next generation or generations. That’s not their only benefit. Trusts also can be used to help reduce taxes, avoid probate, give to charity and even manage assets if the trust owner becomes disabled.
While sometimes considered the domain of the ultrawealthy, trusts can be beneficial to families across wealth levels. The key to unlocking their full range of benefits is understanding how trusts work and choosing the right people to manage the trust when the time comes.
Parties associated with a trust
A trust is a legal entity that holds assets for the benefit of one or more people or entities. There are generally three parties associated with a trust:
- Grantor/settlor/trustor: This is the person or persons creating and funding the trust.
- Beneficiary: The beneficiary is the person, persons or organization designated by the grantor to enjoy the use of the trust assets, subject to the terms of the trust. A trust’s beneficiaries can include one or more individuals or organizations.
- Trustee: The trustee manages and administers the trust. A trustee can be an individual or an organization.
Primary types of trusts
Trusts can be created by executing a trust agreement during one’s lifetime (inter vivos trusts) or at one’s death via a last will and testament (testamentary trusts). While there are many types of trusts, they generally fall into one of two categories:
With a revocable trust, a grantor retains control of the trust terms. The grantor can amend those terms at any time, including switching beneficiaries, adding new terms and selecting a new trustee. The grantor can even dissolve the trust.
A revocable trust allows the grantor to maintain control of assets during his or her life, and can be used to ease the estate administration process following the grantor’s death. It is important to understand that revocable trusts are not tax saving vehicles. Their main purposes are managing assets, planning for incapacity, and easing estate administration.
Unlike revocable trusts, the grantor relinquishes control of the assets placed in an irrevocable trust once the trust is established. Funding an irrevocable trust is a completed gift of those assets, and the grantor cannot make changes to the trust after the document has been signed.
Irrevocable trusts most often are used as wealth transfer tools and are useful for providing funds for individual family members. Because the grantor makes a completed gift of the assets at the time the trust is established, the assets no longer are included in the grantor’s estate during his or her lifetime. Furthermore, any appreciation in the funds inside the trust will pass to the beneficiaries of the trust free of estate tax.
Funding a trust
After the trust is established, the grantor funds it by transferring property to the trust. Assets that can be put in a trust include:
- Investment accounts
- Real estate
- Certificates of deposit
- Cash accounts
- Life insurance
- Personal property (e.g., art, jewelry, valuable furniture, etc.)
- Business ownership
On the other hand, some assets should not be placed in a trust. For example, retirement accounts such as a 401(k), individual retirement account or annuity cannot be transferred into a trust without liquidating the account and creating a taxable event. It is possible to name the trust as a beneficiary of the retirement account. Upon your death, the trust becomes the beneficiary of the account, and the trustee determines how to manage and disburse the funds from that account.
Setting up a trust
If you and your team of advisors have decided a trust is right for you, the first step is to sit down and make decisions regarding the trust. A few of the questions to ask are:
- What do I want to accomplish with this trust? (e.g., reduce taxes, transfer wealth, provide for myself if I’m incapacitated, etc.)
- What assets will be moved into the trust’s ownership?
- Who will be the beneficiaries?
- Who will be the trustee?
An estate planning attorney should draft the trust document to ensure the trust is structured correctly and meets any state-specific requirements. If you choose a revocable trust, this may be a good time to consider updating your will stating that any assets in your individual name should be distributed to the trust at your death. You might also want to create or amend your financial power of attorney to coordinate with your revocable trust.
Trusts are complex planning strategies that can provide flexible, powerful and customizable ways to help protect your assets and family and make transferring your assets more efficient. Please consult with your legal and other advisors to determine if a trust would be appropriate for your individual circumstances. Visit our Trustee Services page to learn more.
The legal concepts and tax information contained herein are general and for informational purposes only. CIBC Private Wealth Management does not provide legal or tax advice, and the information contained herein should only be used in consultation with your legal, accounting and tax advisors.
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