Estates and Trusts Explained
Estates and Trusts are legal documents that serve various purposes in estate planning. They are a vital part of the process, and they can help protect your assets and ensure that they pass to the people you care about.
An estate is the sum of all your property, including anything you own personally. It can include real estate and cash held in a bank account, but it does not include things like jointly owned property, shares in a company, or assets you gave away as a gift. A trust is a legal arrangement in which one person (the trustor) transfers property to another person (the trustee) for the benefit of other people or organizations. Trusts are an effective tool for preserving and protecting assets. They can also be used to avoid probate and reduce estate taxes.
Estate planning is one of the most important elements in financial wellness, as it allows a person to ensure that their assets are handled exactly how they want after they die. It can also help reduce the amount of estate tax a person must pay upon death. Creating trust is among the most common ways to protect your assets and ensure they’re passed on in a way that’s right for you. Trusts can be revocable (meaning you can change them later) or irrevocable.
Types of Estates
There are many kinds of estates, depending on your property type and what kind of rights you have. These can include freehold and nonfreehold estates.
A freehold estate is an interest in land that has a certain duration. There are two main freehold estates: fee simple and life estates.
Fee Simple Absolute: This is the most common type of freehold estate. It grants a complete interest in the land. It is inheritable but not reversible.
Another type of freehold estate is a fee simple determinable, which means that the owner (grantor) has an estate that will be terminated if a condition is met. For example, this could be if the museum uses the property.
A life estate is another type of freehold that gives the holder (life tenant) complete ownership of the land for their entire life. When the life tenant dies, their estate passes to someone else who was nominated in the instrument (trust, deed, or will) that created the life estate.
There are also four other types of nonfreehold estates. These include tenancies at will, for years, from period to period, and at sufferance.
Types of Trusts
There are different types of trusts, and your chosen type will depend on your specific needs and objectives. Some trusts are revocable, meaning they can be changed anytime. Others are irrevocable, meaning that they cannot be changed.
- Revocable trust: A revocable trust, also known as a living trust, can be modified or terminated by the trust creator during their lifetime. This type of trust can be used to avoid probate, manage assets during incapacity, and provide for the distribution of assets after death.
- Irrevocable trust: An irrevocable trust is a type of trust that cannot be modified or terminated by the trust creator once it has been established. This type of trust is often used for asset protection, estate planning, and tax planning purposes.
- Testamentary trust: A testamentary trust is a trust that is established through a person’s will and comes into effect after their death. This type of trust is often used to provide for the needs of minor children or other beneficiaries who cannot manage their own assets.
- Charitable trust: A charitable trust is a trust that is established for charitable purposes. This type of trust can provide tax benefits to the trust creator while also supporting a favorite charity or cause.
- Special needs trust: A special needs trust is a trust that is established for the benefit of a person with a disability. This type of trust can help provide for the individual’s needs without jeopardizing their eligibility for government benefits such as Medicaid.
- Spendthrift trust: A spendthrift trust is established to protect a beneficiary’s assets from creditors or from the beneficiary’s own reckless spending. The trustee has discretion over the distribution of funds to the beneficiary.
- Asset protection trust: An asset protection trust is a type of trust that is established to protect the trust creator’s assets from creditors or from potential legal claims. This type of trust can provide significant asset protection benefits but typically requires the assistance of an experienced attorney to set up properly.