Executing a will and/or trust is a vital and fundamental part of any estate plan. The two are both used to dispose of your assets upon your death. Further, living trusts can be executed and used to manage your assets while you are still living. At the Law Office of Rodney Davis, LLC, we are committed to working with you and helping you decide which of these tools will create the best estate plan for you.
Why Create a Will?
A will is the most basic of estate planning tools and is used to ensure that your assets go to your desired beneficiaries upon your death. Wills are administered in accordance with the Alabama Code of 1975 and involve a probate process that can take several months to complete. Though the probate process can be costly even with a will, it can be even more costly without one. Dying without a will means that assets that would have been passed through your will are distributed based on Alabama intestate succession laws. This deprives you of the opportunity to decide who should receive your assets. If you have a more complex estate, however, it may be worthwhile to avoid the probate process altogether by setting up a trust.
A trust is a legal relationship in which one party transfers assets to another party for the benefit of others. A trust agreement determines how those assets are managed during the creator’s lifetime and after their death. It is a little more complicated than a will. Like wills, trusts are designed to preserve your assets and ensure that they are passed smoothly to the next generation. Common trust types include:
- Testamentary Trusts: This type of trust is created at the death of the grantor as directed in the grantor’s will.
- Living Trusts: These are legal documents usually set up for the purpose of passing your assets to your heirs after your death without the need for probate. Living trusts can be revocable or irrevocable and can be set up to dissolve after your death (and after the assets are distributed) or continue managing the assets for the beneficiaries.
- Revocable Living Trusts. Most people use revocable living trusts to avoid probate, as it can be expensive, time consuming, and is often more of a burden than a help. Because it is a revocable trust, the trust may be modified or changed without the permission of a beneficiary.
- Irrevocable Trusts. An irrevocable trust is a trust that can’t be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets into the trust, effectively removes all of his or her rights of ownership to the assets and the trust. This is the opposite of a “revocable trust,” which allows the grantor to modify the trust.
- Trusts for Minors. Often people choose to leave money to their children or grandchildren in a trust as part of an estate plan. This is done to ensure the money is there for the children’s benefit while they are young for support, education, medical expenses, etc. Once the children reach a certain age or achievement level (such as obtaining a college degree), they may receive money from the trust to do with as they please.
- Marital Trusts. A Marital Trust creates a trust to benefit a surviving spouse and the heirs of the couple. Assets are moved into the trust when the first spouse dies, and the income generated by the assets are transferred to the surviving spouse. When the surviving spouse dies, the remaining assets go to the couple’s heirs.
- Credit Shelter Trusts. This type of trust allows a married couple to avoid estate taxes when passing assets on to heirs. The trust is structured so that upon the death of the investor, the assets specified in the trust agreement (up to a specified maximum dollar value) are transferred to the beneficiaries named in the trust (normally the couple’s children). A key benefit to this type of trust is that the spouse maintains rights to the trust assets and the income they generate during the remainder of his or her lifetime.
- Generation Skipping Trusts. This trust places assets in a trust designed to transfer them to a grantor’s grandchildren, rather than children, in order to avoid estate taxes that occur if the deceased’s children directly inherit the assets.
- Grantor Retained Annuity Trusts (GRAT). This trust allows an individual to make large financial gifts to family members while avoiding the gift tax. The trust is set up as an annuity, allowing the donor to make a donation and receive an annual payment from the annuity for a fixed term At the end of the term, remaining assets in the trust go to the beneficiary as a gift.
- Qualified Terminable Interest Property Trusts. A qualified terminable interest property (QTIP) trust is a type of trust that enables the grantor to provide for a surviving spouse, and also to maintain control of how the trust’s assets are distributed once the surviving spouse dies. Income, and sometimes principal, generated from the trust is given to the surviving spouse to ensure that the spouse is taken care of for the rest of her life.
- Qualified Personal Residence Trusts. This trust transfers the grantor’s residence out of the estate, removing it from the value of the grantor’s estate as a gift. Under the terms of the trust, the grantor can continue to live in the residence for a number of years rent free, before the beneficiaries of the trust are vested in their interests.
- Special Needs Trusts (Supplemental Needs Trusts). Designed for individuals who are either physically or mentally disabled, special needs trusts enable a person to leave property to a disabled individual, many of whom receive government benefits. These trusts prevent a disabled person from being disqualified for governmental benefits when they are left trust assets.
- Third Party Special Needs Trust (Supplemental Needs Trust). The Third Party Special Needs Trust benefits individuals with special needs and is intended to hold assets given or bequeathed to such an individual from a third party, such as parents or other family members, and provides for the person’s care and comfort after using up government benefits. Without this trust, special needs individuals that receive financially based government benefits may lose those benefits.
- First Party Special Needs Trust (Supplemental Needs Trust). Established by a family member, guardian or the court, this trust helps to preserve financial security for individuals with special needs by allowing an individual to benefit from supplemental resources while keeping eligibility for public aid like SSI and Medicaid.
- Spendthrift Trusts. These trusts are established to protect the assets of a beneficiary from creditors or the beneficiary himself/herself. This type of trust has an independent trustee with complete discretion over the distribution of assets of the trust because the parent providing the inheritance does not wish the beneficiary to lose funds because of a debt or hostile divorce.
- Spousal Testamentary Special Needs Trusts. This trust protects assets for the surviving spouse from being counted by Medicaid. It is created by a provision in a will as a testamentary trust and becomes active upon the death of the grantor, so that the surviving spouse is not considered to be the actual owner of the assets named in the Trust.
- Charitable Remainder Annuity Trusts (CRAT). This trust allows a donor to place a large gift of assets such as cash or property into a trust that pays back a fixed amount each year. Upon the donor’s death, the remaining assets are transferred to the designated charity.
- Charitable Lead Annuity Trusts (CLAT). This irrevocable trust provides an income interest to a charitable organization, while passing assets to other beneficiaries. Part of this interest goes to another beneficiary, such as the donor, their family members or other individuals.
- Charitable Remainder Unitrusts (CRUT). This irrevocable trust, created under the authority of the Internal Revenue Service, distributes a fixed percentage of its assets to a beneficiary, and, at the end of a fixed term, the remainder of the assets are transferred to a designated charitable organization.
- Charitable Lead Unitrusts (CLUT). This trust allows a donor to give a variable amount annually from the trust to charity for a fixed term of the life of an individual. When the term of the trust is over, remaining assets are distributed back to the donor or other designated recipient.
- Irrevocable Life Insurance Trusts (ILIT). This type of trust helps to preserve proceeds from life insurance from taxation, and allows the Trust to invest a deceased person’s life insurance benefit and administer the trust for a surviving spouse and children.
- Grantor Retained Unitrusts (GRUT). This type of irrevocable trust allows the grantor to put assets into the trust and receive a variable amount of income from an annuity during the term of the trust, which can be fixed or for the life of the grantor.
- Grantor Retained Income Trusts (GRIT). This type of trust allows the grantor to place assets in the trust for a beneficiary, but still retain the right to receive income from these assets for a certain period of time, after which the beneficiary starts to receive income.
- Gun Trusts. Gun trusts allow the maker to acquire Class 3 weapons and other destructive devices. This trust allows for the transfer of property to and from the trust, and for the modification of trustees and beneficiaries.
- IRA Trusts. To preserve assets from taxation, an individual can establish a trust as the beneficiary of an IRA account, which protects the beneficiaries, such as young children or adult children with special needs.
Wills and trusts can be used together or separately as part of a comprehensive estate plan. The need for one or the other (or both) will be largely determined by your individual situation and unique family dynamics.
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