The many uses of trusts during the estate planning process

On Behalf of | Mar 11, 2024 | Estate Planning |

People who are unfamiliar with trusts are often unsure about their purpose. People frequently think of trusts as a solution for incredibly wealthy people trying to structure an inheritance for their children or grandchildren.

Certainly, trusts have historically served that purpose and can help with the transfer of wealth to the next generation. However, they can do much more than that. A well-structured and properly funded trust can achieve a host of different estate planning goals for the individual establishing a trust. The following are some of the more common uses of trusts.

Asset protection planning

Perhaps someone intends to start a small business and worries that their resources could be at risk of liquidation should their business fail or face major lawsuits. Maybe someone worries about accruing unsustainable levels of debt during their retirement years. The decision to transfer assets into a trust before someone faces aggressive collection activity could potentially preserve resources by protecting them from creditor claims during someone’s golden years or even after their death.

Benefits planning

Older adults often take for granted that Medicare can provide them with support for health challenges as they age. However, many older adults discover the gaps in Medicare coverage when they have a surprise medical challenge. Trusts can change the ownership status of crucial assets and potentially make it easier for someone to quickly qualify for Medicaid if they require long-term care support later in life. People who want to leave resources for a family member with special needs might also use trusts for the same purpose. A family member can derive regular support from the trust without losing their state benefits due to a large inheritance.

Tax planning

There are several kinds of taxes that could affect someone’s estate. Some people end up responsible for estate taxes when they have millions of dollars in property. Other times, there could be capital gains taxes that diminish the value of inherited assets should family members try to sell the resources they received from others. The decision to transfer certain property into a trust can diminish the value of an estate and reduce the chances of estate taxes. Having a trust manage certain resources could also diminish the likelihood of other tax responsibilities, such as capital gains taxes incurred by impulsive family members selling assets.

Trusts are also useful for providing an inheritance to those in difficult personal situations. Those struggling with addiction or in an abusive marriage might benefit from the protection of a trust. Trusts can also reduce the likelihood of challenges against testamentary documents and conflict among someone’s beneficiaries.

Learning about the most common uses of trusts by seeking legal guidance may help people determine if they should create and fund one while planning their estate.