How To Leave Money in a Trust for a Spouse or Child
Trusts offer the advantage of creating specific boundaries for release of funds while protecting the rest of the money and property from creditors. Even more advantageous, if you plan properly, you can eliminate some or all estate taxes on the trust and leave more wealth behind for your family, and less for tax collectors.
Gather All Money and Property for the Trust
In order to begin the process of creating your trust documents, you will need to give your lawyer access to all accounts and deeds that are to be placed in the trust. Remember that the purpose of the trust is to remove the property from your possession and place it into the possession of a legally-designated entity. Everything from houses to savings accounts and even money market accounts can be placed into the trust. The trust can contain as much or as little as desired.
Pick the Type of Trust
There are three basic types of trusts—testamentary, revocable and irrevocable—each with their own advantages and disadvantages.
A testamentary trust is a trust established in your will. This trust will not take effect until after you are deceased, and the will must go through probate before the trust is established. This means that while the funds will eventually be placed in trust for your spouse or children, it must first become public record and will most likely be reduced due to attorney and court fees from probate. The funds entering into the this trust are fully taxed according to the current estate tax law.
Revocable Living Trust
A revocable living trust is created while you are still alive. The property is removed from your possession and placed into the trust. Since the trust is revocable, you can eliminate it at any time. Traditionally, you will assign yourself as trustee over the trust, and will appoint a replacement in the trust papers for after your die. You can freely remove and add property to the trust up until you die and, if you drafted a pour-over will, even after you die. This trust will not go through probate, but it will be taxed under the current estate tax rate, because the trust was revocable. The reason for this is that the IRS still considers it in your possession.
Irrevocable Living Trust
If you have no objections to giving up control over the trust while you are still alive, you can create an irrevocable living trust. An irrevocable living trust cannot be canceled and no property that is placed into the trust can be removed. You cannot be the trustee on this trust, but rather a third party must manage it. You can still be the first beneficiary on the trust, which means you may be able to live comfortably off of the interest accrued on the trust account. This trust is not subject to estate taxes, but may be subject to income taxes depending on how much is transferred into the trust a one time.
Draft the Document with an Attorney
Once you have determined the type of trust that is best for your situation, contact your estate planning attorney and set up a consultation to discuss your expectations for how the trust will operate and function. Remember that you can place as many limitations or privileges on the trust as you desire and would feel is best for your spouse or children.