Missouri Estate Planning: 8 Types of Trusts To Consider
For many people, estate planning isn’t something that comes up as a regular topic of conversation. It’s understandable. No one wants to think about what will happen after they pass away. But if you have children or grandchildren, a business, or even a few pricey personal assets, making a solid plan for how your estate should be divided up upon your death is very important.
There are many different ways to leave a financial legacy and one of the most common is setting up a trust. If you’ve never heard of a this estate planning tool before, or aren’t sure which one is right for you, we’ll explain the differences to help you get started in putting together your estate planning documents.
What is the Importance of Estate Planning?
Estate planning is all about distributing, preserving, and managing an individual’s assets once they die. Don’t be fooled into thinking that this is only for the wealthy. Everyone, especially close family members, can benefit from effective estate planning.
Having your final wishes legally noted can avoid lengthy disputes among your loved ones over who should have which assets. If arguments move on to probate court to reach settlement, that can be an incredibly costly process. It also means that a court-appointed administrator decides where your assets go, rather than you.
If you’ve made solid plans for avoiding probate, you remove a significant stress on those left behind. You may even be able to spare your family from certain estate taxes when they inherit your property.
You’re likely familiar with the concept of writing a will. This is a legal document that outlines instructions on what property is being left to whom. If there’s minor children involved, a will should outline who will have legal guardianship and care of those children. It is important to note, that Estate Planning with a Will does not avoid the Probate Process. Wills do not provide the authority to transfer ownership until they have been admitted to Probate.
Wills are one of the most common parts of estate planning, but not the only piece in the puzzle. Life insurance policies and estate trusts are also frequently used alongside wills to help individuals pass their wealth onto loved ones.
Questions to Consider When Estate Planning
When you’re new to estate planning, you likely have many questions about how to leave your assets to your family, friends, or even charitable organizations. Before meeting with an estate planning professional, take the time to think about your current life circumstances and how these could impact your plans.
If you’re widowed, you, as the surviving spouse, will in most cases automatically inherit their property. But when you die, how do you want these assets to be passed on? Particularly if you’re divorced or part of a blended family, think about the current family dynamic and how you can best avoid causing additional heartache upon your passing. If you’d like to leave some of your wealth to a charitable organization, make sure that’s clearly noted too.
For families with special needs individuals, be sure to plan ahead for any care that they may need in your absence. You may need to set aside money to cover these costs.
The same goes for families with minor children. Think about who will be responsible for their care if you were to die before they reach adulthood. Decide if money for college is the legacy that you want to leave them, or if you want them to inherit funds at a certain age.
If you’re a business owner, your financial decisions become more complicated. There are state-to-state considerations that you’ll need to take into account. Depending on how your business was formed, you may have articles of incorporation that detail who ownership should be transferred to when you die.
Individuals who have high-value items like art or collectibles should also think through their plans carefully. Who do you want to inherit these family heirlooms? Since they can’t be divided like money, you could run into disagreement among loved ones if your feelings aren’t made clear in your estate planning documents. Similarly, you should also make a plan for digital assets like family photos, videos, or any NFTs and cryptocurrency.
Finally, you should also include health care information in your estate and retirement planning documents. Decide who will make monetary and medical decisions on your behalf should you become unable to do so yourself. You should appoint a trusted healthcare and financial power of attorney in your documentation to handle this.
What is a Trust?
A will is a good place to start with estate planning, but you should also consider creating trusts. A trust is where assets are legally transferred from their owner (the grantor or trustor) to a designated trustee. The assets become trust property, which is managed by the trustee according to the wishes of the grantor. When the designated time for distribution arrives, the trustee will pass the assets on to the beneficiaries.
Unlike a will, trusts can be established during the lifetime of the grantor and can take effect immediately, rather than only upon their death. These are known as “living trusts.” Many people choose to do this to get around various tax laws and probate.
Should you die without a will, or if you only have a Will, Missouri law requires that your assets go through probate court to dictate how they should be divided. In general, any assets that are held in a trust can bypass probate since you have clear beneficiary designations outlined.
Additionally, some types of trusts allow your beneficiaries to avoid paying estate taxes, since the property belongs to the account rather than the deceased individual. For example, Missouri does not levy a state gift tax. But the federal limit is $16,000 per year, per recipient. Anything over this must be claimed on your tax return and count against your total federal estate tax exemption up to $12.06 million in 2022. (This amount will increase slightly until 2025 when the current tax rules sunset and the amount drops back to $5 million).
Certain types of trusts can help to avoid these estate taxes.
Each trust operates differently. Take a look below to get an idea of which trust type may be ideal for your financial situation.
8 Types of Trusts in Missouri
The most common type of trust is a revocable, or living, trust. This is where a grantor can give their assets to a trustee, with the option to undo or alter the trust at any point before their death – at this point, the trust automatically becomes irrevocable. You can change the beneficiaries, add or remove assets, or even completely dissolve the trust during your lifetime.
Since there’s plenty of flexibility here, the IRS still considers the assets to be part of an individual’s estate, so estate taxes can be applied upon death. But it also means that you can change your mind about what you want to leave and to whom.
The opposite of revocable trusts are irrevocable trusts. These trusts become a separate legal entity once created and the ownership of the assets they hold is transferred from the grantor to the trust. Once assets have been added and beneficiaries determined, these trusts cannot be changed.
As assets are removed from the individual’s estate as soon as the trust is formed, they’re no longer part of the taxable estate. That also protects them from creditors, which make them good options for individuals in high-risk professions like medicine or law.
If you’re concerned about the care that someone in your family may need after your death, you can create a special needs trust. This allows an individual with disabilities to receive financial support via the trust upon your death, without any impact to their federal or state assistance funds like Social Security Income (SSI).
A multigenerational, or dynasty, trust allows you to pass wealth down through several generations of your family, without incurring any transfer taxes.
As an irrevocable trust, taxes may only be applicable when the initial transfer to start the trust is made and only if the assets meet the federal minimum for taxation. While no estate taxes would be due for future generations, income tax would still be owed on any gains made by the trust at any point in the trust’s existence.
If you’re concerned about particular assets becoming vulnerable to creditors, an Asset Protection trust is a good solution. This isolates your designated assets from anything else that you own in an irrevocable trust. They are often set up in foreign countries for a set number of years.
Once the trust has expired, the assets will be returned to the grantor. At this point, a new Asset Protection trust can be established if creditors are still a threat.
Charitable Remainder/Lead Trust
Charity remainder/lead trusts are irrevocable and known as “split interest” trusts. In a Charitable Remainder Trust, the grantor and other beneficiaries can receive an income from a partial tax deduction on any assets placed into the trust each year. The charitable organization of your choice - essentially a charitable beneficiary - would receive the remainder after the tax deduction. These can be put in place for a maximum of 20 years and won’t be subject to additional estate taxes.
In a Charitable Lead Trust, the charitable organization receives the income (and possibly partial corpus distributions) for a set period of time and at the expiration of that time period, the balance of the Trust is distributed to other beneficiaries (typically family members such as grandchildren).
For some types of trust, beneficiaries are permitted to use their interest in the trust as collateral on a loan. In spendthrift trusts, though, this is not allowed.
Trusts like this are ideal for beneficiaries where there’s concerns over their financial responsibility. While they will be able to access the assets as part of their inheritance when you die, they won’t be able to use it as collateral in the meantime.
Known colloquially as “the poor man’s trust”, a Totten trust is often free to create and doesn’t require any legal trust documentation. To create one, a grantor must deposit money into a bank account, name themselves as a trustee, and set the beneficiary as another individual or corporation.
The title on any bank accounts should be “In Trust For” or “Payable on Death To”, with the beneficiary named. Once the grantor dies, the funds will be moved to the beneficiary. You can only use these types of trust for cash, rather than real estate or physical assets. But these trusts do avoid probate and any regulations around gift tax.
Protect Your Missouri Family’s Future Wealth
Having a comprehensive plan in place before you die can help to reduce the stress on your loved ones during a difficult period of time. Effective estate plans, including both wills and trusts, can ensure that your final wishes are met and that your heirs aren’t responsible for unnecessary taxes or fees.
One of the greatest gifts that you can leave to your loved ones is peace of mind. BTC’s Trust Department offers all the benefits of a professional trustee, with personalized service that fits your financial needs.