Trusts for Dummies
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A trust is a legal agreement where one party (the trustor) gives another party (the trustee) the power to hold and manage assets for the benefit of another party (the beneficiary).

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It is similar to a magic box in which you place your treasures, and a trusted friend has the power to control the box according to your wishes.

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What Is a Trust and Why Do You Need One?

When people talk about estates and trusts for dummies, they're referring to one of the best financial planning resources out there. A trust is essentially a legal bucket that contains your possessions while you're alive and distributes them based on your wishes when you pass away.

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Most people think trusts are for wealthy families. This is not true. The practice of trusts nowadays is for families of all income levels that want to keep their wealth intact and take care of their loved ones in the best manner possible.

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The main reason people create trusts is control. You can choose exactly how your properties are directed and distributed, even after you're deceased to handle things yourself. This kind of control makes trusts highly beneficial in estate planning.

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The Three Main Players in Every Trust

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Every trust includes three main players that you ought to be familiar with.

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The Trustor

The trustor (or grantor or settlor) is the person who creates the trust and puts assets into it. If you are reading this article and contemplating establishing a trust, then you would be the trustor.

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The Trustee

The trustee is the person or organization responsible for managing the trust according to your specifications. This could be a relative, friend, or professional trustee like a bank or trust company.

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The Beneficiary

The beneficiary is the one who benefits from the trust. This may be your children, spouse, charity, or in some instances, even you.

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Knowing these roles is important as they tell us how the trust works and who does what.

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Revocable Trusts for Dummies: The Most Popular Choice

When people search for "revocable trusts for dummies," they're hoping to understand the most common type of trust used in estate planning today.

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A revocable trust is exactly what its name says - you can change it or terminate it entirely during your lifetime and when of sound mind. Due to this, revocable trusts are extremely popular with families who want to be in charge of their assets.

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With a revocable trust, you usually continue to be both the trustor and trustee during your lifetime. This maintains your assets in your hands and under your control just as they were originally. The difference is that they are now in the name of the trust instead of you.

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The real benefits of revocable trusts are apparent when you pass away or become disabled. Then your successor trustee takes over and operates the show or distributes the property according to your instructions.

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Revocable trusts spare families the probate process, the court procedure that authenticates wills and divides assets. Probate is sluggish, expensive, and public. Trusts keep your family's financial affairs confidential and typically allow assets to be dispersed more quickly.

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Trust Taxes for Dummies: What You Need to Know

One of the most disorienting aspects of trusts has to do with taxation. When people search for "trust taxes for dummies," they want simple explanations of what trusts do for their tax situation.

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In revocable trusts, the tax situation really couldn't be more straightforward. Since you can change or cancel the trust at any time, the IRS treats the assets in the trust as still being your personal property. This means you'll have to report all the trust income on your regular tax return, just like before.

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You won't need to prepare a separate return for a revocable trust while you live. The trust uses your Social Security number, and the income is simply passed through to your personal return.

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The tax situation becomes more complex with irrevocable trusts, or trusts you can't change once you set them up. These types of trusts may be assigned a special tax ID number and could have separate tax returns filed.

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Trust taxes can become complicated if trusts receive high income or if trusts distribute money to beneficiaries. When either of these situations is present, it's best to utilize a tax consultant who is experienced with trust taxation.

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Other Types of Trusts Defined Briefly

While revocable trusts are popular, there are several other trusts with different purposes.

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Irrevocable Trusts

Irrevocable trusts cannot be changed once you establish them. Even though this impossibility of changing it sounds like a negative, irrevocable trusts allow extraordinary tax benefits and asset protection not possible with revocable trusts.

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Charitable Trusts

Charitable trusts allow you to support charities that are significant to you while potentially receiving tax benefits. Charitable trusts can pay income to you or your family members while ultimately benefiting charity.

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Special Needs Trusts

Special needs trusts protect disabled beneficiaries by funding their needs without making them ineligible for government assistance like Medicaid or Social Security disability.

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Life Insurance Trusts

Life insurance trusts contain life insurance policies and help minimize estate taxes and leave liquidity to cover estate expenses.

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There are a number of different types of trusts, each for a specific purpose, and many families utilize more than one as part of their overall estate plan.

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How Trusts Work in Real Life

Learning about how trusts actually work helps de-mystify these legal contracts.

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Assume Sarah creates a revocable trust and places her house and investment accounts within it. Things do not really change much in her life during her lifetime. She continues to live in her home and has control of her investments as she did before.

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When Sarah passes away, her successor trustee role goes to her daughter Jennifer. Jennifer can take control of the trust property without going through probate court and begin distributing it according to the intentions of Sarah.

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If Sarah asked Jennifer to have her grandson receive money for school but not until he is 21, Jennifer would retain those funds until that time. This illustrates how the trusts can provide ongoing control and management of the dispersal of the assets.

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Advantages of Establishing a Trust

Trusts possess numerous advantages that make them attractive for estate planning.

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Privatization of Privacy

Privatization of privacy is the biggest benefit. While wills are public documents during probate, trusts are private documents. Your family's financial information are kept confidential.

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Elimination of Probate

Elimination of probate saves money and time. Probate is a months- or years-long process, during which your loved ones may not receive access to assets that they need. Trusts offer access to funds immediately.

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Incapacity Planning

Incapacity planning provides you with peace of mind. If you are incapacitated by illness or injury, your successor trustee can step in and act without court approval.

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Control Over Distributions

Control over distributions enables you to determine when and under what circumstances beneficiaries will inherit. You can specify that children should inherit money only to pay for education, or you can distribute assets over a span of years.

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Potential Tax Advantages

Potential tax advantages may come into play depending on the type of trust and your situation. While revocable trusts contain no immediate tax advantages, there are other trusts with possible tax advantages.

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When to Think About Establishing a Trust

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There are numerous situations under which the establishment of a trust is particularly beneficial.

• If you own property in multiple states, trusts enable you to bypass probate in all states where you own property. This might equate to a tremendous time and money savings for your loved ones.
  
  
• Trusts are also used by families with young children to ensure proper administration of the assets until children reach age. Rather than outright inheritance of assets to minors, trusts put adult supervision on inheritances.
  
  
• Entrepreneurs use trusts quite often to ensure smooth business succession. Trusts can hold business interests and direct orderly transfer to the next generation.
  
  
• Individuals who are afraid of family wars are benefited by trusts as trusts provide clear instructions and remove emotional decision from asset distribution.
  
  
• In case you have a disabled relative, trusts can ensure they will be well taken care of and remain eligible for government benefits.

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Step-by-Step Guide to Setting Up Your First Trust

Creating a trust is a series of important steps that need careful attention.

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Step 1: Determine Your Goals

What do you want to accomplish with your trust? Are you most concerned with saving on probate, distributing property to minor children, or minimizing taxes?

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Step 2: Choose the Right Type of Trust

Based on your goals, decide whether a revocable trust, an irrevocable trust, or special trust is most appropriate for your circumstances.

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Step 3: Select Your Trustee

This is a critical decision, because your trustee will have vast responsibility. Consider things like trustworthiness, business sense, and accessibility.

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Step 4: Complete the Trust Document

Have a competent estate planning attorney draw up a trust document that properly states your wishes and complies with state law.

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Step 5: Fund the Trust

Creating the trust document is only half of it. You must actually transfer assets into the trust for it to function.

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Step 6: Maintain the Trust

Keep records organized, update beneficiary information as needed, and have the trust reviewed periodically to ensure it still meets your needs.

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Common Trust Mistakes to Avoid

There are numerous preventable mistakes individuals make establishing and maintaining trusts.

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Not funding the trust is the most common error. Simply signing a trust form will never get you what you need if you do not actually contribute assets to the trust.

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Choosing the wrong trustee will lead to monstrous difficulties. Be sure to choose someone who is not only trustworthy but also capable of getting the job done required.

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Not updating the trust when the conditions in life change has unexpected effects. Marriage, divorce, having children, dying, and significant changes in wealth all can require changes in trusts.

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Mixing personal and trust property leads to confusion and can undermine the trust's benefits. Have the trust property held properly and maintain proper records.

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Not taking tax consequences into account can have unwanted tax problems. Understand how your trust affects your taxation and take action appropriately.

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Estates and Trusts for Dummies: Working Together

Estates and trusts work together to create comprehensive estate plans.

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Your estate consists of everything you possess at death. This is all assets in trusts as well as all assets you hold separately. Effective estate planning combines all such assets to fulfill your goals.

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Trusts are tools in your overall estate plan. They work together with other estate planning tools such as wills, powers of attorney, and life insurance and retirement account beneficiary nominations.

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A well-planned estate plan can use a revocable trust for most assets and still include individual bequests in a will for family treasures and guardianship arrangements for minor children.

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The secret is to make all the elements of your estate plan collaborate synergistically instead of conflicting or overlapping holes in coverage.

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Frequently Asked Questions About Trusts

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Do I Still Need a Will with a Trust?

Yes, you still need a will with a trust. The will is a fall back for any assets that are not being placed in the trust and can address other important matters like guardianship of children.

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How Much Does a Trust Cost?

Fees vary by complexity and location, but pay more for a trust than for a basic will. But the fee is usually offset by savings in probate and other benefits.

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Can I Serve as My Own Trustee?

In revocable trusts, typically you serve as your own trustee during your lifetime. You will need to name a successor trustee to take over after you are no longer able to serve as trustee.

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How Often Should I Update My Trust?

Review your trust every few years and update it upon significant life events like marriage, divorce, births, deaths, or significant changes in your wealth.

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Creating a trust is not necessarily more complicated when you understand the basics. These legal vehicles provide solid instruments for protecting your assets and ensuring your wishes are carried out. Whether you're considering a simple revocable trust or want to explore more sophisticated options, the bottom line is having qualified professionals with you as you navigate and help guide you into creating something that fits your unique situation and wishes.

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Remember that estates and trusts for dummies isn't about oversimplifying important concepts - it's about making complex legal and financial topics accessible to everyone who wants to protect their family's future.

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