In this article, you’ll learn how trusts work and how to protect your assets with them.
What is a trust?
A trust is a legal arrangement that lets a third-party individual, known as a trustee, hold assets on behalf of one or more beneficiaries.
Revocable vs. irrevocable trust
Trusts are generally of two kinds: revocable and irrevocable. The former can be changed anytime, meaning the IRS considers revocable trust assets part of the grantor’s taxable estate. As such, the grantor will continue to pay income taxes on revenue generated by the trust and possibly estate taxes on those assets after their passing.
On the other hand, irrevocable trusts can’t be changed after execution, and are best for asset protection. The assets are transferred from the grantor’s estate and transferred to the trust. Any liabilities, such as income and capital gains taxes on the assets, are not passed on to the beneficiaries. Most revocable trusts become irrevocable upon the death of the grantor.
Why should you secure your assets with a trust?
Here are some reasons you should use a trust to protect your assets:
Wealth control
A trust allows you precise control over the asset transfer terms, who gets what, and when they’ll get your assets. For instance, you can create a revocable trust (living trust) so that the trust assets stay accessible during your lifetime while designating the beneficiaries for when you have passed away.
This protects your assets from complicated situations, such as children from multiple marriages.
Protection from creditors and lawsuits
An irrevocable trust can protect your assets from being lost to creditors and lawsuit settlements after you have passed. If you’re a business owner in Pennsylvania with funds tied up in various investment schemes, a trust can protect your assets from being liquidated as cash liability for debt settlements after you have passed. This ensures that your beneficiaries get what is designated to them, regardless of any lawsuit.
Privacy and probate savings
A trust can be arranged differently to specify how and when the assets are passed on to the respective beneficiaries. The unique thing with trusts is that they avoid probate. This way, the beneficiaries access the assets quicker than they would if you used a will. This helps maintain privacy and helps your beneficiaries save in court fees and taxes during probate.
What kinds of trusts can help safeguard your assets?
Three types of trusts can help you protect your assets:
- Asset protection trust
- Bypass trust
- Totten trust
A Totten trust is a payable-on-death (POD) bank account where you assign a beneficiary. You maintain control of the account during your lifetime and avoid probate after you’ve passed away.
On the other hand, a Bypass trust allows you to leave assets to your spouse estate-tax-free. Following the death of one spouse, the assets in a bypass trust are split into two parts: a revocable marital trust and an irrevocable family trust.
An Asset Protection Trust (APT) is the most effective way to secure your assets. It is specially designed to keep your beneficiaries from losing your assets to lawsuit settlements and debt obligations.
You should not know that APTs aren’t legally recognized in Pennsylvania. However, you can contact a legal expert based in Pennsylvania to help you assess whether you qualify for establishing it in another state.
Protect your assets with a trust in Pennsylvania
If you’re in Pennsylvania and are looking for a way to secure your assets to ensure not only that the designated beneficiaries get what you bequeath but also protect your assets from becoming a liability in costly lawsuits, setting up a trust is the way to go. Reach out to us today to learn more.