A living trust is created to identify how the grantor’s assets will be directed during their lifetime and upon his or her death. The trust is in effect during the grantor’s lifetime, and upon death, it will avoid probate for all assets that have been transferred to the trust. Probate is a costly, time-consuming process that many estates do not need.
To set up a living trust, a trust document must be prepared that usually names the grantors (the persons who are setting up the trust) as the trustees of the trust. The trustees are responsible for managing the trust and its assets. The trust will typically nominate other persons, banks, or trust companies as successor trustees. The successor trustee(s) will take over management of the trust after the death, resignation, or incompetency of the original trustee(s).
The trust also provides for distribution of the grantor’s estate after their death. These provisions can be the same as those found in a will and might include trusts for younger beneficiaries, gifts to charities, etc. Depending on the size of the estate, the trust might also include provisions that will reduce or eliminate federal estate taxes.
After the trust is signed, the grantors transfer their assets to the trust. If assets are not transferred to the trust, additional legal work, possibly including probate of these assets, will be required after the deaths of the grantors.
A testamentary trust is created under one’s will to go into effect only AFTER the death of the grantor. This type of trust does not always avoid probate, but keeps complete control with the grantor during his or her life.
Charitable trusts are created to donate assets to a qualified charitable entity. There are two basic types of charitable trusts to choose from – a charitable remainder trust and a charitable lead trust.
A charitable remainder trust allows you to keep the assets under your control for your entire life. Once you set up a charitable remainder trust, you may transfer the assets you want to donate (investments, real estate, etc.) to the trust. The assets remain in the trust until your death, but you receive the tax deduction as soon as you transfer the assets to the trust. You also enjoy the benefits of the assets, including dividends and income, while you are alive. Upon your death, the assets you are keeping in the charitable trust pass on to the beneficiary you have named. The beneficiary must be a charitable organization, religious organization, non-profit university or research foundation for you to be allowed to transfer these assets to them in this method. You may also change the beneficiary of the trust at any time during your life or by will.
A charitable lead trust is just the opposite of a charitable remainder trust. With a charitable lead trust, the asset benefits the charitable organization of your choice immediately, during your lifetime. Any income or access to the asset is under the control of the charitable organization while you are living. Upon your death, however, the ownership of the asset passes to your beneficiaries (spouse, children, etc.) out of the hands of the charitable organization.
There are many tax benefits with either type of trust. For both trusts you are allowed to take a one-time tax deduction for the gift. You may also sell an asset in a charitable trust without incurring capital gains tax. Also, you no longer have to show the asset as part of your net worth.
Charitable trusts are complicated giving entities and you should consult with your tax advisor about the exact tax benefits if you are considering setting up a charitable trust.
