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Choosing the Right Trust for Your Needs

What type of trust will best meet your needs? Explore some of your options here.

Image featuring a happy young family as they gather around a puppy.

It’s time to do some myth-busting about trusts.

People think of trusts as only for the wealthy, but the trusts of today are a powerful estate-planning tool that can benefit people at all income levels, says Maurice E. Quiroga, Senior Vice President–Senior Fiduciary Advisory Specialist for Wells Fargo Private Bank.

A trust can help protect your assets, guard your privacy, prevent family conflict, and help ensure that your assets are distributed according to your wishes. Today, with so many types of trusts to choose from, it can be difficult to decipher which will best fit your needs.

Here, Quiroga and Bruce Stone, Senior Vice President–Senior Fiduciary Advisory Specialist at Wells Fargo Private Bank, share important information on one of the most common types of trusts, plus four others that might address a specific need—and help you make the right decision for your estate plan.

Revocable Living Trust

Gives you control over how and when your assets are distributed when you die or become incapacitated

This is the most common type of trust, and Quiroga says that almost anyone with assets could benefit from including one in their estate plan. A revocable trust keeps the assets it contains out of probate, protects them from creditors or a failed marriage, and allows you to spell out exactly how you want them to be distributed upon your death.

It’s called “revocable” because it can be changed at any time. “If there’s a change in your family situation—divorce, birth of grandkids, sale of a business, loss of a family member, tax law changes—you have the flexibility to amend your document,” Quiroga says.

How it works: With the help of your estate planning attorney, you create the trust, put assets into it, and name yourself as trustee (the person who will manage the trust). You also name beneficiaries and a successor trustee who will manage your affairs, according to the terms you included in the trust, if you become incapacitated or die. For example, you could stipulate that each of your children will get a specific stipend from the trust’s income every month, but will have access to the principal only for higher-education costs or a healthcare emergency.

“It’s up to you how much control you want to put into the document,” Quiroga says. “It can be just 15 pages or as thick as a Yellow Pages directory.”

Once you’ve set up your living trust, you need to fund it. If you don’t, there will be no assets to deliver to your beneficiaries. “It’s the simplest thing to do—yet it’s the most common mistake I see,” Quiroga says. “Just retitle your assets in the name of the trust.”

Other types of trusts

While revocable living trusts are flexible tools in many wealth transfer plans, those with specific needs may want to explore other types of trusts that may align with their situation. Talk to your estate planner and wealth advisor about whether any of these would be a good fit for you.

Marital Qualified Terminable Interest Property (QTIP) Trust

Provides for your spouse after your death while protecting your assets for future generations

Despite its jargony name, this type of irrevocable trust is a simple solution if you’re worried about your spouse’s ability to handle the family finances after your passing. You can set it up so that your spouse gets all the income from the trust while providing some oversight through the trustee to help protect him or her from those who might wish to take advantage.

Depending on your wishes, QTIPs may be a good option if you’ve been married before because you can make sure your current spouse is provided for during his or her life while still ensuring any remaining assets go to your own bloodline rather than to your spouse’s children from a previous marriage. One final benefit of this type of trust is that it can help lower estate taxes (and some capital gains taxes) if those are a concern.

Special Needs/Supplemental Needs Trust

Provides for a child or sibling with a disability without jeopardizing his or her government benefits

If you have a child with special needs, you want to make sure there’s enough money to provide lifetime care. But if you leave money or property directly to the child with special needs, he or she must report it as income, which puts him or her at the risk of losing government benefits such as Social Security and Medicaid. A Special Needs Trust allows you to put money from a personal injury settlement, gifts, or an inheritance into the trust without discontinuing public support. (See “Special Needs Trusts: An Estate-Planning Strategy for Parents and Grandparents” for more.)

Irrevocable Life Insurance Trust (ILIT)

Helps keep a life insurance payout from triggering estate taxes

The estate tax limit has increased dramatically in recent years to $11.4 million per taxpayer as of January 1, 2019, but the limit currently is scheduled to drop back to $5 million in 2026—and you never know for sure what it will be when you pass away, says Stone.

If you’re worried that proceeds from a life insurance policy could push the value of your estate over the estate tax limit, you can set up an ILIT to own your life insurance policy and keep the proceeds out of your estate when you die. The trust can purchase the policy directly, or you can transfer ownership of an existing policy into your ILIT, Stone says. However, he notes that there is a three-year look back period if you do decide to do a transfer.

Charitable Trusts

Help you make tax-efficient contributions to charity while still providing for your heirs

If you’re philanthropic, there are two types of charitable trusts—a charitable remainder trust or a charitable lead trust—that can help you preserve your wealth while giving to charity. You can set both up while you’re still alive or as part of your estate plan.

If you have an asset with significant taxable appreciation, you can put it in a charitable remainder trust. The trust will then generate a stream of income that you can direct to one or more beneficiaries. At the end of a specified period or when the beneficiary dies, the remaining assets are donated to the charity or charities of your choice. So, for example, you could set one up at your death that pays out annual payments to your children for 20 years; after that time, whatever is left would go to charity. A charitable lead trust is almost the opposite, Stone says. In the scenario above, the payments would go to the charity and the remainder to beneficiaries.

Plans for transferring wealth are personal and unique, and these are just some of your options. With the impact of the Tax Cuts and Jobs Act, now is a good time to sit down with your advisors at Wells Fargo Private Bank to discuss your strategy for wealth transfer.

Michelle Crouch writes about consumer finance, parenting, and more from her home in Charlotte, North Carolina. Her work has appeared in Reader's Digest, Parents magazine, and The New York Times. Images by iStock

What can Wells Fargo do for you?

As you think about your legacy and wealth transfer goals, take time to sit down with your wealth management professional and outline your vision.

Wells Fargo and Company and its affiliates do not provide legal advice. Wells Fargo Advisors does not provide tax or legal advice. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.

Trust services available through banking and trust affiliates in addition to non-affiliated companies of Wells Fargo Advisors. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.

This information is provided for educational and illustrative purposes only.


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