With estate planning, should you create a will or form a trust to protect your assets? The answer is a trust, but not just any type of trust. You should consider establishing an irrevocable family trust.
The formation of a family trust starts with the trust's grantor transferring assets and naming the beneficiaries. Then, the grantor designates a trustee to manage the assets placed in the trust on behalf of the named beneficiaries. As the third party of a family trust, the beneficiaries receive financial benefits from the assets held in the trust. You can name only family members as the beneficiaries of your irrevocable family trust. A family member can include aunts. uncles, cousins, and siblings.
As a type of living trust, you can create either a revocable or an irrevocable family trust. An irrevocable trust requires you to name another person as the trustee. Once the assets go into an irrevocable trust, you can not change any of the conditions written into the trust.
The first step is to meet with an estate planning lawyer to determine whether this type of trust is right for your unique financial situation. Your attorney should discuss the pros and cons of establishing this type of trust. A comparative analysis of the different types of trusts you can form is another effective way to decide which kind of trust to establish.
After you meet with your lawyer and decide which type of trust works best for you, the subsequent steps are relatively straightforward. You determine who will be the trustee. If you want to be the trustee, then you have to create a revocable family trust. Since we are discussing an irrevocable family trust, the next step in the formation process is to name a trustee. The trustee you choose should be someone that you believe will carry out your wishes.
The next step involves writing the terms of the trust agreement. Although there are plenty of software programs that can help you create the terms of the agreement, you should once again work with your estate planning attorney to ensure the terms you include match your financial wishes. State law might require you to notarize the trust agreement and then file it with the local register of deeds.
Losing control of a trust might make forming one that is irrevocable a bad idea. However, creating this type of trust delivers many of the same advantages as starting a revocable family trust. You protect your assets from creditors, as well as keep your financial information private. Another advantage is your assets remained protected from judgments and lawsuits.
Taxpayers that have large estates benefit the most from establishing an irrevocable family trust. If you leave assets in your estate that exceed the tax-free gift limit set by the IRS, the amount of money over the limit is taxed at a federal rate of 40 percent. Placing your assets into an irrevocable family trust ensures your assets remain exempt from costly federal estate taxes.
For some grantors, avoiding costly federal estate taxes more than balances out the advantage of having more control over your assets. When every other benefit of forming a family trust is the same for a revocable and an irrevocable trust, determining which one to choose should involve the advice of an experienced estate planning lawyer.