After dedicating years to working and saving, ensuring the efficient and thoughtful transfer of your assets to loved ones or charities becomes paramount. Could a trust help with this important goal? What exactly are trusts, and how might one help you?
In simple terms, a trust is a legal document that governs your wishes for how and when to transfer your assets, including sentimental items, to your loved ones or charitable organizations. However, in practice, the landscape of trusts encompasses various types, terminology, structures, and tax rules, which can be perplexing.
To help navigate this complexity and evaluate which type of trust aligns with your goals, here is an overview of the potential benefits, types and terms associated with trusts.
The difference between wills and trusts
Wills provide instructions on how to distribute your assets after you die. Trusts are legal contracts that allow you to transfer your assets, before or after death, to an account to be managed by yourself (if you are still living) or others. Importantly, assets held in trust do not need to go through probate court—allowing your beneficiaries to access their inheritances more easily and quickly. While it may make sense for some people to have only a will, typically those with a trust(s) should also have a will to cover any property not covered by the trust.
Why have a trust?
Estate planning through a trust can provide peace of mind that your assets will be protected and distributed according to your wishes. While establishing a trust can be more expensive and time-consuming than establishing a will, trusts offer several potential benefits, including:
- Avoiding probate, simplifying and speeding up the distribution of your assets.
- Providing greater flexibility and control through specific instructions on not only who receives your assets but also how (e.g., spread out over time, at the discretion of someone else, etc.).
- Minimizing conflict, as trust instructions cannot be contested in court like wills can.
- Maintaining privacy by keeping your assets from becoming public record as part of the probate process.
- Protecting assets from creditors and lawsuits.
- Minimizing taxes, as certain types of trusts can reduce estate, gift or income taxes.
Revocable versus irrevecobale trusts and other terminology
There are two main types of trusts: revocable and irrevocable. A revocable trust allows you to maintain control of your assets during your lifetime, with the ability to change or revoke the trust at any time after it's created.
Irrevocable trusts, on the other hand, cannot be modified. However, many benefits, such as protection from creditors and reduced taxes, are provided only by irrevocable trusts.
Additionally, there are several frequently used trust terms that can be confusing but are relatively simple once you understand their meanings. These include:
- Grantor: the individual who establishes and funds the trust.
- Trustee: the individual or institution responsible for managing and distributing the assets.
- Living trust: established during the grantor's lifetime.
- Testamentary trust: created through a will and becomes irrevocable upon the grantor's death.
Different types of trusts
Beyond the two broad categories of trusts, there are many different types of trusts that
can address various goals for yourself, as well as the people and causes you care about. Here are examples (i.e., not an exhaustive list) of trust types and the main purposes behind them:
Marital trusts
These trusts are established by one spouse for the benefit of the other when the first spouse passes away. They ensure that assets pass seamlessly to the surviving spouse and also may help the surviving spouse avoid estate taxes during their lifetime.
Charitable trusts
There are two types of charitable trusts: a charitable lead trust and a charitable remainder trust. Both involve gifting assets to a trust, which makes ongoing distributions to either a noncharitable beneficiary (CRT) or charitable beneficiary (CLT), with any remaining assets at the end of the trust’s term going to a charitable beneficiary (CRT) or noncharitable beneficiary (CLT). These trusts can help balance charitable goals with income needs and provide potential tax benefits.
Spendthrift trusts
This type of trust carefully specifies when and how the trust assets are distributed, making them particularly useful in situations where there are concerns that the beneficiaries will irresponsibly spend their inheritances. They can also be a good option if your loved one struggles with an addiction to drugs or alcohol. For example, you can specify that the money does not go directly to the individual but rather to a landlord, educational institution or medical providers.
Business trusts
Instead of holding more common types of assets, such as property and securities (e.g.,
stocks and bonds), business trusts hold business interests—an individual’s rights to a stake in a business. There are many potential estate planning and tax advantages for business owners of transferring all or a portion of their business into a trust. They can also be especially useful if you're not sure how other family members will react to change or if you have a business partner with whom you no longer see eye to eye.
Special needs trusts
If you have a loved one with a disability, a special needs trustOpens pdf can help you ensure they receive financial support without jeopardizing their access to government benefits. These trusts are designed to supplement rather than replace government benefits and can provide for the special needs and care of your loved one in the long term.
Education trusts
An educational trust specifies that the trust’s assets be used to pay for educational expenses. They may be a good option for those who intend to fund considerable educational costs for their loved ones by offering flexibility and control; however, they are not the right option for everyone as they do not offer the same tax benefits provided by 529 college savings accounts.
Life insurance trusts
A life insurance trust holds life insurance proceeds and can be used to minimize estate taxes. It can also provide liquidity to your heirs when you die; for example, if you are a business owner whose net worth is mainly tied up in your company, the trust could provide immediate cash from the payout to your heirs.
Grantor retained annuity trusts (GRATs)
Grantor Retained Annuity Trusts (GRATs) are used to minimize taxes on significant financial gifts to family members. They enable the grantor to transfer appreciating assets (i.e., assets expected to increase in value over time) to the next generation with little or no gift tax owed and receive annuity payments from the trust for a specified period of time.
How are trusts taxed?
Trusts can trigger several types of taxes, including income, capital gains and estate tax. The type of trust, its structure, and the distribution of its assets impact the taxes generated and who is responsible for paying them. For revocable trusts, any income or capital gains tax owed is generally the responsibility of the trust’s creator (or “grantor”) until they die, at which point it becomes the responsibility of the beneficiaries. Irrevocable trusts, on the other hand, are responsible for any income or capital gains tax owed and may be subject to different tax rates than personal assets held outside of trust. There are also different rules and tax rates for state taxes.
Another important consideration is estate taxes. While under current tax law, assets up to $13.61 million can pass free of estate tax to your heirs, this amount is set to be roughly cut in half at the end of 2025. A revocable trust generally will not reduce any estate tax due on assets that exceed that threshold, but irrevocable trusts can be used to transfer such assets free of estate tax, although gift taxes may apply.
In short, trust taxation is complicated, making it critical to work in close collaboration with legal, tax, and financial advisors when identifying the right trust for your unique goals.
How to set up a trust: 4 easy steps
- Step 1: Consult your advisors to determine what kind of trust best fits your needs.
- Is your primary concern ensuring your assets pass seamlessly to your spouse or other loved ones, or do you have more specific concerns about how you would like your assets to be distributed?
- Do you have a blended family and therefore unique considerations for how your assets are distributed between your spouse and children?
- Do you expect your taxable estate to exceed the threshold for the federal estate tax exemption?
- Do you have significant charitable intentions?
- Step 2: Talk to a lawyer with experience creating trusts—typically an estate planning attorney—about your personal situation. Explain what's most important to you and what your concerns are. This kind of attorney can help you understand the benefits of a trust and help you draft a trust with provisions that will work for your needs. It's also important to coordinate with your tax and financial advisors, so that the full picture of your financial situation and goals is contemplated.
- Step 3: Find the right trustee. This person could be a friend or relative or a corporate trustee. The trustee manages the distribution of assets from the trust according to your wishes. To create and implement a trust effectively, name a trustee who you can count on to objectively carry out your intentions. Your trustee should be responsible and reliable, and have the required experience and expertise, along with the ability to effectively communicate with beneficiaries. A corporate trustee can provide professional, unbiased management of your trust, bringing objectivity to decision making that can help protect family relationships and establish continuity while carrying out your wishes across generations.
- Step 4: Move assets into the trust when your attorney recommends doing so. No one will get the benefits of a trust fund if it's empty, so if relevant, be sure to retitle assets to reflect that the trust now owns them.
Creating a trust may be more complicated and take longer than drafting a will. However, when it comes to having the confidence that your wishes will be fulfilled and that the people and causes you care about will be looked after the way you want, having a trust may be well worth the extra time and effort. For help collaborating among your advisors to implement the right type of trust, please reach out to a TIAA advisor.
Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.
The TIAA group of companies does not provide legal or tax advice. Please consult your legal or tax advisor about your specific circ*mstances.
TIAA managed account services provide discretionary investment management services for a fee.
Investing involves risk and the value of your investments may gain or lose value and fluctuate over time. Investments in managed accounts should be considered in view of a larger, more diversified investment portfolio. Individuals should consult with an independent tax advisor, CPA and/or attorney for specific advice based on the individual's personal circ*mstances.
TIAA Trust, N.A. provides investment management, custody and trust services. Advisory services provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser.
This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circ*mstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor's own objectives and circ*mstances.
© 2023 TIAA Trust, N.A.
