Trusts are an important way to do estate planning, but many people get confused about the different types of trusts.
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In this clip fromIndustry Focus: Financials, Motley Fool analystGaby Lapera and Dan Caplinger, the Fool's director of investment planning, talk about various types of trusts, including various types of revocable and irrevocable trusts. By getting a firmer grip on how each type of trust works, you'll be able to work more effectively with your estate-planning professionals to get a good plan in place for your needs.
A full transcript follows the video.
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This podcast was recorded on Sept. 22, 2016 for the Oct. 31, 2016 episode.
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Gaby Lapera: What I'm hearing is that trusts are potentially abetter vehicle for a lot of people. And I knowthere's different types of trusts. The ones that we've been talking about have been living trusts, and of those living trusts, there's bothrevocable and irrevocable trusts.
Dan Caplinger:Yeah, a living trust,when you hear somebody talking about a living trust, they're generally talking aboutrevocable living trusts,because that's the kind of trust that you can make changes toduring your lifetime. As you pointed out,irrevocable trusts are things that, once you create that trust, you can't change the aspects of it,you can't change the instructions. For the most part, there are morespecific, specialized reasons to useirrevocable trusts during your lifetime, but in the vast majority of cases, when you're talking about basic estate planning, you're talking aboutsetting up a revocable trust.
Lapera:I know -- or,I think I know, because I'm not 100% clear on trusts -- the irrevocable trust, while you can't make changes to it, I was under the impression that theappreciated assets aren't going to be subject to estate trust,which might be one of the reasons why you might be interested in opening anirrevocable one versus a revocable living trust. Of course, you can have multiple trusts set up, right?
Caplinger:That's true. You can havemultiple trusts set up. And you're right that,when you're talking about gift and estate tax, by setting up an irrevocable trust that vested the time of theinitial formation of the trust, thevaluation of that trust at its formation is the value that will be used fordetermining the gift and estate tax valuethat is charged against your unified gift and state tax credit at your death. That's very complicated.
Lapera:It's so complicated. [laughs]
Caplinger:But as you say, the net result of that is, if you give property that's worth $10,000, you put that into anirrevocable trust now,over the next 30 or 40 years, it climbs up to $100,000, the value that will be treated as the appropriate value for gift and estate tax purposes will be that $10,000 value at the time that youmade the gift, not the $100,000 that's theappreciated in value at the time of your death. That's assuming you made an irrevocabletrust that's not subject to being clawed back into your estate. Those rules areprobably more technical than we want to get intoat this point. In general, you can --with the help of your attorney -- set up an irrevocable trust to achieve those ends and get the estate tax relief that you want.
Lapera:I have a series of questions for you about trusts, and then I want to get into the estate tax. Rapid-fire. Where can I get a trust?
Caplinger:Anestate planning attorney is probably the best way tostructure a trust. An estate planning attorney will know what questions to askin order to figure out exactly what you want to have under what circumstances, and to get thedocument set up the way that you want.
Lapera:How much does it cost to set up a trust?
Caplinger:It usually costs...legal fees from place to place vary greatly, but what I will say is this: It usually costs more up-front to set up a trust than it does to draft a simple will. But,when you consider the additional costlater on of a will, the cost ofhiring an attorney to go through the probate process, the total costs that you'll spend on estate planningthroughout your lifetime and after your death in the case of a will and the probate proceeding are often roughlycomparable. So, it's more a matter of timing than it is a matter of how much you'll spend. You might save more up-front on a will, but if it's costly to administer in probate after your death, thenthat's when the costs will catch up to the total amount you would have paid to the trust.
Lapera:So,it's kind of whether or not you want your kids to have to deal with it, or you.
Lapera:Shouldyou update a trust? If so, how oftenshould you update a trust?
Caplinger:Whether you have a will or a trust,it makes sense to have it taken a look atregularly in a number of situations. In general,every three to five years is a good idea just to make sure that there aren't any major legal changes that would affect thesituation. However, you should have it looked at morefrequently than that if there are major changeseither to your financial situationor to your family situation.
For instance, if you get married,if you get divorced, if you have a child, these things aregenerally going to change the way that you want your assets to pass after you die. So, it makes sense to have your estate planning documents taken a look at to make sure that they still do what you want to do. Andthat goes not just for the will and for the trust, but it also goes for thosebeneficiary designations thatwe were talking about earlier. You definitely don't want anaccount that you set up when you were married to go to your ex-spouseafter you get divorced. And yet,there are a huge number of beneficiary designations out there that do that, just because the person forgets that thatbeneficiary designation was out there in the first place.
Lapera:AndI want to listeners know that your estateattorney will probably charge you a fee to update your trust and/or will,but it's a lot less than it was to set it up in the first place.
Caplinger:Often, yes. Moreimportantly, it avoids somemajor problems that canoccur if you have an out-of-date document thatmight not actually meet the needs and wishes that you have because of thesechanges that can occur.
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