In Maryland, individuals may want to include a trust as one component of their estate plan but do not understand precisely how a trust works or the benefits it can provide. Understanding basic trusts and their variations can help individuals make informed decisions about protecting and distributing their assets.
Trusts are financial vehicles for distributing assets to heirs or beneficiaries upon your death. Trusts keep your assets from going through the probate process, which can become lengthy and costly.
A trust consists of legal documents that detail the trust’s assets and grant ownership to the trust’s beneficiaries. The individual who owns the assets sets up the trust as the trustor, and the person who manages the trust and asset distribution upon the owner’s demise is the trustee.
Different types of trusts
You can establish a living trust, which becomes effective while you are alive. You can transfer assets in and out as circumstances change if your living trust is revocable.
If you choose to set up an irrevocable living trust, you will transfer assets into the trust while alive, but once the transfer completes, you no longer own the assets; the trust does. This factor limits your access to the assets but has other benefits, such as tax planning. You can set up a testamentary trust, which only becomes established upon your death, as directed and specified in your will.
These trusts cover the basic types, but many other variations exist, such as a special needs trust to set aside assets for a special needs child’s care after you are gone.
If a trust does not meet your financial goals or requirements, you may choose an alternative way to transfer your assets to loved ones. You might miss out on potential tax benefits, but setting up a will may cost less than setting up a trust.
Suppose you aim to provide educational funds for children or grandchildren. In that situation, you can choose a 529 savings plan or a custodial account to put money aside and name a specific beneficiary.
Setting up a trust requires careful thought and planning. By understanding the mechanics of trusts, you can make better decisions that ensure your assets get distributed according to your wishes.