Trusts are extremely useful tools that can be used to accomplish many different goals in estate planning. But they are artificial legal creations, and unless you work with them on a regular basis, they can be confusing.
At Chesapeake Wills and Trusts, we believe in making complex topics approachable and easy to understand. While we would be happy to talk to you about the specific ways a trust could operate in your situation, here’s a general overview of trusts and how they are used.
Defining a Trust
A trust is a legal arrangement where one party, known as the trustee, holds and manages assets for another party, known as the beneficiary. Traditionally, trusts were used to protect and manage assets for individuals who were not prepared to manage their own property, such as minors. A mature trustee, sometimes a financial professional or attorney, would manage property and disburse funds to the beneficiary as called for in the trust agreement.
Today, trusts are set up for a wide array of purposes, such as reducing estate taxes, avoiding probate, or protecting assets from potential creditors. For certain types of trusts, the person who creates the trust also serves as the trustee and beneficiary, so they still control and use the property in the trust. For other types of trusts, once someone transfers property into the trust, they lose control over the property.
Types of Trusts
There are several varieties of trusts, each serving different purposes. The three main types of trusts are:
- Revocable Living Trust: This is a flexible trust that you can change or dissolve during your lifetime. It helps in managing your assets while you’re alive and ensures they are distributed according to your wishes after your death, bypassing probate. With this type of trust, you generally would serve as the trustee and beneficiary and then designate successors to take over when you pass away.
- Irrevocable Trust: Once you set up an irrevocable trust, you cannot change it. Because you no longer own the property once it has been transferred into the trust, this type of trust can provide tax benefits and protect your assets from creditors. It can also be used to reduce your countable assets so that you can become eligible for Medicaid long-term care benefits. If an individual with special needs has property put into trust for them instead of receiving it directly, they can continue to remain eligible for government benefits such as Medicaid and SSI.
- Testamentary Trust: Created through your will, this type of trust only comes into effect after your death. It’s often used to manage assets for beneficiaries who are minors or otherwise unable to manage their own finances.
Why Consider a Trust in Maryland?
In Maryland, many people set up revocable living trusts so that their loved ones can avoid the often lengthy and costly process of probate. By placing your assets into a trust, you ensure that they can be transferred directly to your beneficiaries without the need for court involvement. This can save time, reduce legal fees, and provide a smoother transition for your loved ones.
Trusts offer numerous benefits beyond avoiding probate. They can provide:
- Privacy: Unlike a will, which becomes public record after your death, a trust can remain private.
- Control: Trusts allow you to specify exactly how and when your assets will be distributed.
- Protection: Certain types of trusts can protect your assets from creditors or from being misused by beneficiaries who may not be good at managing money.
Trusts and Taxes
Another significant benefit of some types of trusts, particularly irrevocable trusts, is the potential for tax savings. By transferring assets into an irrevocable trust, you may reduce the size of your taxable estate, which can lower the estate taxes your beneficiaries might owe after your death. It’s essential to work with an experienced estate planning attorney to understand how these tax benefits might apply to your situation. As the value of real estate in Maryland increases, more and more families each year need to plan if they want to reduce the impact of the state’s estate tax.
Setting Up and Maintaining a Trust
The first step to setting up a trust is to talk with your estate planning attorney about your goals so that your legal advisor can explain the options available. Your attorney can also help you determine who your trustee and successor trustees should be.
After the trust has been created to accomplish your goals, then you need to fund the trust by transferring assets into it. This is another critical task where guidance from your attorney can be crucial.
Once you have a trust in place, it’s important to keep it up to date. Life changes such as marriages, divorces, births, and deaths can all affect your estate plan. Regularly reviewing and updating your trust ensures that it continues to meet your needs and reflects your current wishes.
Chesapeake Wills and Trusts, Your Partner in Estate Planning
At Chesapeake Wills and Trusts, we’re here to help you understand all your estate planning options and make informed decisions about your future. Whether you’re considering a revocable living trust, an irrevocable trust, or another type of trust, we can guide you through the process and help you create a plan that provides peace of mind for you and your loved ones.
Call (410) 590-1900 today or complete the online form to schedule a consultation. Let’s work together to secure your legacy and protect your family’s future.