Your guide to trusts

Here’s what you need to know to navigate the often complex world of trusts.

26 Sep 2019

Questions you can ask your UBS Financial Advisor

  • What is a trust?
  • What types of trusts might you encounter and which is the best option for you?
  • How can you lock in your legacy with a trust?

Estate planning and putting trusts in place can help you control your legacy while limiting taxes and optimizing the inheritance for those you care about: your family, friends and charities. Depending on the level of planning you undertake, your heirs could find themselves in dispute as they navigate the often complex probate process, a public and sometimes costly division of assets approved by a judge. Probate is considered a "voluntary" annoyance because with proper planning it can be totally bypassed.

Trusts, on the other hand, allow you to avoid probate while simplifying the asset-transfer process. Trusts improve privacy, give you more control and can even help you save on taxes; even more, they let you know that your assets will go where you want in the future. But before you rush and create a trust, it's important to understand the different types of trusts in order to make the right choice for your financial legacy. A well-considered estate plan may involve several trusts which accomplish different aspects of an overall estate plan or a single trust that is designed to adapt to foreseeable and perhaps even unforeseeable circumstances.

What is a trust?

A trust is a type of legal entity that can hold assets for beneficiaries. Whether you want to leave money to heirs or charitable causes, you can do it with a trust. Trusts can offer estate tax and income tax benefits, privacy and ease the transition of assets to the next generation and beyond.

A revocable trust allows you fund a trust,  maintain access to the assets, and change its terms and beneficiaries at any time; an irrevocable trust may help lower estate taxes and maintain a degree of control over the administration of trust assets for your beneficiaries, but you and your estate permanently lose access to the funds once moved into the irrevocable trust. Revocable trusts are typically better when you may still need access to the funds during your lifetime. If you can afford to go without them, an irrevocable trust may offer tax savings and additional asset protection.

In both cases, a funded trust can help your family avoid public probate proceedings. This gives your estate more privacy than simply using a will. It can also simplify transferring assets to kids, grandkids or other beneficiaries. These features make trusts particularly popular with families with sizable estates looking to preserve assets and privacy, while dealing with the already difficult experience of losing a loved one.

Types of trusts

Trusts come in different forms that can be a bit more complex than simply referring to revocable and irrevocable trusts. Here is a list of some types of trusts you may encounter:

  • GRAT - If you want to gift assets to your family but need to keep the interest and growth of the account for living expenses, a Grantor Retained Annuity Trust is a good choice. This account allows transferring appreciation of assets to the next generation tax-free. It will typically pay you back the assets you contribute while retaining appreciation for your beneficiaries.
  • CRUT - Many causes may be close to our hearts. If a charitable organization made a big difference in your life, a Charitable Remainder Unitrust allows you to contribute to a trust that makes regular payments to a named beneficiary during your lifetime. After passing away, the remainder of assets are given to a a charitable cause.
  • CLT - If you have multiple pet causes and issues your care about, Charitable Lead Trusts enable someone to donate to a qualified charitable organization or more over a period of time.
  • ILIT - Life insurance benefits may avoid estate tax anyway, but if you are at risk of estate taxes on a policy you own, an Irrevocable Life Insurance Trust allows you to make yourself the trust both the owner and beneficiary of a life insurance policy. This may allow avoiding estate taxes on life insurance proceeds so your heirs get the maximum benefit.
  • QPRT - If you own a cherished vacation home or have lots of memories in your primary residence and want to keep it in the family for generations to come, a trust can help. Qualified Personal Residence Trusts enable passing down a home. A QPRT can hold a primary or secondary residence while allowing you to retain use of the asset. At the end of the trust, the house passes to beneficiaries at a discounted value. This can help save on gift taxes while allowing you to live in your home.
  • IDGT - Gift taxes can add up fast depending on your assets. If you want to put assets away for your kids while you pay the taxes today, consider this kind of trust. Intentionally Defective Grantor Trusts allow a grantor to pay income taxes on trust assets while the trust grows unreduced by income taxes.
  • Dynasty trusts - If you want to go beyond giving to your kids and want to turn your wealth into a multi-generation dynasty, the appropriately named Dynasty Trust or Multigenerational Trust could be the right choice. This trust allows you to fund a trust without triggering generation skipping taxes (GST) that typically get charged on large gifts to grandchildren. Properly drafted, it may also provide asset protection for your beneficiaries.

Lock in your legacy with a trust

Trusts may seem complicated, so be sure to reach out to a UBS advisor if you need help. A little extra time and cost up-front can lead to much bigger savings later on.

Remember, you've worked hard to build an estate you can be proud of. With the right trust, you can ensure it goes on to do good for generations to come.


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