It’s natural to aim for as efficient and tax-advantaged of a wealth transfer to your loved ones as is possible. Of course, you may already have a will and even some powers of attorney. However, there is still the probate process to contend with, and some type of trust is one way to help your assets avoid this.

A trust can allow your assets to be passed directly to your heirs without going through the publicity and expense of probate. It can accomplish many other legal purposes as well. Note that this doesn’t mean that a trust necessarily is the best option for your situation.

You will want to review different estate planning options and types of trust with experienced estate planning counsel and other experts in this area. They can help guide you on the legal implications of various options available, each one’s pros and cons, and what might make sense for your situation and goals.

A Quick Overview of Different Trusts

Before covering different types of trusts in depth, here’s a quick rundown of some common ones:

• Revocable living trusts
• Irrevocable living trusts
• Marital trusts
• Credit shelter trusts
• Charitable remainder trusts
• Generation-skipping trusts
• Special needs trusts
• Spendthrift trusts
• Testamentary trusts
• Totten trusts
• Qualified terminal interest property trusts
• Qualified residence trusts

Here is a list of common different types of trusts that are used today by retirees, with each type covered in more depth.

Revocable Living Trust

This kind of trust is drawn up by the grantor, or creator of the trust. The trustee then manages the assets in the trust for the beneficiary or beneficiaries.

In many cases, all three parties are the same person or couple. The terms of this kind of trust can be changed at any time at the discretion of the grantor.

Irrevocable Living Trust

The terms of this type of trust can’t be changed by the grantor or anyone else once the trust has been created. Irrevocable trusts are typically used by wealthy grantors who need to place some of their assets outside their taxable estate.

Irrevocable trusts often hold life insurance policies in them that are used to pay estate taxes without being taxed themselves. Generally speaking, the assets must have been placed in the trust at least three years before the grantor dies.

Otherwise, the assets in the trust will be pulled back into the grantor’s taxable estate.

Marital Trust

Also known as an “A” trust, this trust allows one spouse to pass all their assets to the other spouse with no estate tax when the grantor spouse dies.

Credit Shelter Trust

Also known as a “B” trust, this irrevocable trust is used by married couples. The first spouse to die will bequeath a dollar amount of assets to this trust when they die that is exactly equal to the estate tax exemption. The rest of the deceased spouse’s estate will then pass to the surviving spouse.

The amount in the trust will effectively escape estate taxation when it is dispersed upon the death of the other spouse. These trusts are used to preserve the estate tax exemption of the first spouse to die, so that it doesn’t go unused.

If this trust isn’t used, then all the assets will pass to the surviving spouse. But the surviving spouse will only be able to use their own unified credit to shelter their assets from estate taxes.

A credit shelter trust thus preserves the unified credit of the first spouse to die so that it can be used as well. Credit shelter trusts are usually used in conjunction with marital trusts to ensure an efficient dispersal of assets.

Charitable Remainder Trust

This type of trust allows the grantor(s) to specify certain assets that they want to donate to charity after they die. They will receive the income that these assets produce while they are still living, with the trust corpus passing to the charity upon their death.

Generation-Skipping Trust

This type of trust allows the grantor(s) to pass some or all their assets to heirs that are at least two generations younger than them (grandchildren in most cases). This helps the estate owner to reduce estate tax liability tied to transfer of assets to their children.

Special Needs Trust

This type of trust is used to provide for the care of a beneficiary with special needs without affecting their eligibility for government benefits. In many cases, the trust will pay out a stream of income for the duration of the beneficiary’s life without taking out any principal.

Spendthrift Trust

Spendthrift trusts are designed to provide for beneficiaries who aren’t able to manage their own affairs well enough to be handed any of the trust corpus.

These trusts resemble special needs trusts. They will usually pay out a stream of income to the beneficiaries, but don’t give them access to any of the principal assets in the trust.

Testamentary Trust

This type of trust is activated upon the death of the grantor. It’s irrevocable. Its primary use is to ensure that the beneficiaries don’t get the assets in the trust before the appointed time.

Totten Trust

This type of trust sets up a payable-on-death account. It allows you to add a beneficiary to your bank or investment account, who will receive the assets in the account upon your death, without the assets going through probate.

Totten trusts are generally the simplest form of trust used today.

Qualified Terminal Interest Property Trust

Known informally as “Q-TIP” trusts, this type of trust is used by families where there has been divorce, remarriage, and stepchildren. In most cases, the grantor will allow the second spouse to receive income from the trust while they are living.

Then the assets are passed to the children from the first marriage upon the death of the surviving second spouse. Stepchildren may receive a share of the property as well in some cases, depending upon various factors.

Qualified Residence Trust

This trust is used to exempt a house or other piece of real estate from estate taxes. It can be especially beneficial if the property in the trust has the potential to appreciate substantially in price over time.

A Quick Wrap-Up on Trusts

A trust can accomplish many purposes. They can be used to specify how you want your assets to be given out, upon death, in ways that a will can’t usually accomplish.

A will can guide your assets through the probate process, whereas a trust can exempt your assets from probate. However, only a will can dictate what will happen to any children or other dependents once you are no longer here.

Both types of documents are usually necessary in order to maintain a well-crafted estate plan that covers all bases. Consulting with experienced estate planning attorneys and other professionals in this field can help you sort through your legal options.

Just One Piece of the Legacy Planning Puzzle

Of course, legal is only one aspect of an estate plan. Your legacy strategy also covers the assets that you wish to pass onto your heirs. There are a number of financial vehicles and financial strategies that can be tapped toward that goal.

An experienced financial professional who understands not only retirement issues, but also legacy planning issues, can help you prepare for this. Among other things, they can walk you through options that provide heirs with tax-advantaged proceeds at death, or even pay an enhanced death benefit that is guaranteed.

Looking for an experienced financial professional to help you? No sweat, many independent financial professionals are available at SafeMoney.com to serve you.

Use our “Find a Financial Professional” section to get started. You can connect with someone directly and request an initial appointment to discuss your retirement and legacy financial goals. Should you need a personal referral, call us at 877.476.9723.

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In estate planning, this is known as planning for a wealth transfer. If you haven’t heard of it before, wealth transfer simply refers to the process of passing wealth from someone who has died over to their beneficiaries.

Effective wealth transfer can be done through a variety of strategies, including annuity contracts or life insurance policies, wills, trusts, and gifts of cash or tangible assets prior to death. The typical goals for wealth transfer strategies are to maximize the estate assets that are left behind as a legacy to heirs and to make the transfer as tax-efficient as possible.

Using Life Insurance for Wealth Transfer

Single-premium life insurance is a common tool in the wealth-transfer toolkit. Clients who own liquid assets that they don’t plan to use during their lifetime can use this form of insurance to leverage their bequests to heirs.

For example, someone has $200,000 in a CD that they plan to pass on to their children. They could cash the CD in and use the proceeds to purchase a single premium life insurance policy. At death, the life policy will pay proceeds to heirs that will be greater than the CD money alone would have given them.

What About Wealth Transfers Subject to Estate Tax?

People with large estates subject to estate tax can also use life insurance to cover the cost of those taxes. They can explore options for using a trust and purchase a life insurance policy inside the trust that will pay out when they die.

The death benefit won’t be counted as an asset of the insured at the time of death, provided that certain conditions are met.

Just as in the example given above, the death benefit from life insurance is generally exempt from income taxes. This is true regardless of who owns the policy or who receives the death benefit.

There can be an exception to this when a life insurance policy is purchased by a corporation. However, that doesn’t apply to the vast majority of life insurance policies today.

Do Annuities Make Sense for a Wealth Transfer Strategy?

What about those who can’t pass through underwriting for life insurance? Or perhaps they already hold enough life insurance coverage to the point where life insurers will be hesitant to issue new, additional coverage for them.

Whether you fall into a situation like this or simply want some reliable protection for assets that you won’t use in retirement, annuities are another tool for wealth transfer. They aren’t exempted from income tax as life insurance is, but they do protect assets from creditors.

Moreover, annuities are also exempt from the probate process. What about when you want to leave a larger legacy than what is held in the annuity contract?

Maximizing Legacy Assets with Enhanced Annuity Benefits

Good news here, some annuity contracts come with an enhanced death benefit option. The enhanced death benefit will pay out proceeds that are a multiple on the value of the annuity money at time of death. For example, some contracts with an enhanced benefit rider will increase the death benefit that the heirs would otherwise receive by 30%.

In other cases, an annuity death benefit will pay out the highest value that an annuity contract ever reached in its duration. Other annuities come with similar features that can also deliver enhanced death benefits in unique ways.

Your financial professional can walk you through different options if this is of interest to you.

Keep in Mind These Other Practical Tips

So, what else are some good pointers to keep in mind when planning for an efficient wealth transfer? Any good estate plan will usually require the following documents, listed below, to be drawn up.

Don’t forget to consult with high-quality estate planning counsel and tax professionals as you navigate this process. You might be able to obtain referrals from your financial professional.

Wills

This document guides the decedent’s assets through the probate process. It dictates who will take custody of any minor children or other dependents.

Living Wills

A living will specifies the medical conditions under which the author would like to be taken off of life support. This can help with providing clarity on an already-sensitive issue for loved ones.

Revocable Living Trusts

A revocable living trust is a separate legal entity that can buy, sell, and manage property that is put into it by the grantor. The grantor creates the trust and then names one or more trustees to manage the assets in the trust.

The beneficiary receives the income that is generated by the trust in most cases, unless otherwise specified in the provisions of the trust. The grantor, trustee, and beneficiary are often the same person or couple, at least while both are living.

All assets that are titled in the name of the trust are unconditionally exempt from the probate process, so that all of these assets will pass quickly and efficiently to their intended beneficiaries.

Some trusts are titled as revocable, which means that they can be changed or modified according to the wishes of the grantor after they have been established. Some trusts are irrevocable, so that assets that are placed inside them aren’t counted as part of the grantor’s taxable estate.

Durable and Medical Powers of Attorney

These documents allow a designated person to handle the grantor’s assets. It also permits the designated person to make medical decisions on the grantor’s behalf in case they become incapacitated for any reason.

A durable POA allows the designee to pay bills and handle other everyday business on the grantor’s behalf while the grantor is recovering from their trauma or accident.

Letter of Instruction

This handy document can make any estate executor’s life much easier. This document has no legal authority, but it lists out practical items for key estate planning functions.

These can include:

• Where to find the keys for the grantor’s RVs and other vehicles
• Login information for the grantor’s financial accounts
• Contact information of the grantor’s financial advisor, attorney, tax consultant, and insurance agent
• Directions to the location of any other assets, such as a vacation home

Effective Wealth Transfer Planning Gives Protection and Peace of Mind

Estate planning isn’t just for the super wealthy. Virtually everyone needs most, or all, of the documents above in order to protect themselves and their heirs in the event of an emergency (or tragedy).

A well-thought-out estate plan can ensure the smooth and quick transfer of your wealth in the manner that you prescribe. Consult your financial advisor for more information on estate planning and how it can benefit you.

What if you are looking for a financial professional to guide you in these matters? Or perhaps you are looking for assistance with overall retirement planning or want a second opinion of your existing financial plan.

For your convenience, many experienced and independent financial professionals are available to help you at SafeMoney.com. They aren’t beholden to any one insurance or financial services company, so they are able to offer solutions that best fit your personal situation.

You can get started by visiting our “Financial Professional” section and connecting with someone directly. In your initial appointment, you can discuss your goals, concerns, and situation and explore a working relationship. Should you need a personal referral to someone, please call us at 877.476.9723.

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IRAs, qualified employer retirement plans, taxable investment accounts, annuities, and life insurance will be among the numerous assets that provide a legacy for generations to come.

Depending on the situation, some methods of wealth transfer may be more advantageous than others. People who work with advisors specializing in legacy planning strategies can save a great deal of time, confusion, and money in figuring out what makes sense for their goals.

Strategic guidance from their financial professional, in conjunction with high-quality estate planning legal counsel, can help ensure the smooth transition of their wealth to their heirs.

What Are Some Starting Points for Legacy Planning?

There are many factors to consider in legacy strategies and estate planning. One of the first considerations is whether someone’s children are capable of handling money themselves.

What if they aren’t of legal age or are spendthrifts? Then an attorney can help you determine if a revocable living trust or something else may be needed in order to specify when and how money may be distributed to the beneficiaries.

For example, the trust may stipulate that the beneficiary receives a third of the money in the trust when they are 25 years old, another third when they are 30, and the rest of the money at 35.

That timeline would give them some time to ‘grow up’ while still providing a measure of financial support. 

Marriage and divorce are other key elements of estate planning. In many cases, it’s not uncommon to see someone married to their second spouse while the ex-spouse and kids are still living together.

In scenarios like these, your attorney can help you determine if trust options, such as a Qualified Terminal Interest of Property (QTIP) trust, can be used to make sure that the client’s children from the first marriage don’t lose their share of the inheritance. 

Don’t Forget About Taxes

Estate taxes can also loom for wealthy clients. People who hold large blocks of stock in a closely-held business will need to know how to most effectively pass them on to heirs without triggering a tax bill for the estate.

Your financial professional and your attorney can help you explore your options like a second-to-die life insurance trust or charitable donations. 

Should You Consider Annuities for Wealth Transfer Goals?

Your financial advisor can help you explore different options that make sense for your wealth transfer goals. An annuity may be worthwhile to count among the possible vehicles that you investigate.

With its sturdy contractual guarantees, an annuity can pay your heirs a guaranteed death benefit once you are no longer here. What if you want to leave a larger legacy than what is in the annuity contract?

Then some annuities will provide an enhanced guaranteed death benefit that is a multiple on that value. Some annuity contracts with an enhanced benefit rider can increase the death benefit amount that the heirs would normally receive by 30%.

In some variable annuities, some death benefits will even pay the beneficiary the highest value that the annuity ever reached in its duration. Other annuity contracts may have similar enhanced benefits that are available. Your financial professional can walk you through these possibilities.

Of course, this form of protection comes at a cost. That being said, it can provide peace of mind for both the annuity owner and their beneficiaries.

An Alternative if Life Insurance Isn’t an Option

Using an annuity to deliver a guaranteed death benefit can be especially attractive for those who can’t meet the medical underwriting requirements for a life insurance policy. 

What might be some situations that might exclude someone from approval in the underwriting process? At a high level, those situations can include:

• Poor health
• Bad smoking habits or drinking habits
• Risky occupation or lifestyle (e.g., you work on construction sites with an elevated risk to make your living)
• Unfavorable personal medical history
• Unfavorable family history

This is by no means an exhaustive list, but they are a few situations in which someone might not obtain approval from the life insurance company.

Annuities are one way that you can pass along a guaranteed death benefit to your loved ones if you aren’t able to obtain adequate life insurance coverage due to personal or health complications.

What Are Some Other Advantages of Annuities?

Annuities can also keep money in a dependable place with contractual guarantees for protection, so there is a very good chance that you will keep the money you put in.

Fixed-type annuities are well-known for this and keep your money under lock-and-key. Fixed indexed annuities also guarantee the annuitant’s principal.

However, the interest rate that a fixed index annuity earns tends to vary. But indexed annuities have usually had higher growth over time than fixed annuities, so the reward is usually worth the risk. 

Unique Protections

Another key advantage that annuities provide is that they are usually exempt from probate. The probate process can be expensive (due to court costs and creditor claims), it can dredge up family conflicts that are financially and emotionally demanding, and probate proceedings are also very public.

Anyone can log on to the probate court website in order to see exactly what someone has in their estate. But annuities don’t have to be placed inside a trust, qualified plan, or IRA of any kind in order to avoid probate.

In this regard, annuities stand out as one of the few instruments that are inherently exempt from the probate process.

Annuities also generally have protection against creditors in many cases. Although the laws concerning this vary somewhat from one state to another, annuities are difficult assets for creditors to attach.

Many people have heard of how O.J. Simpson was living off of money that he had in annuities after he lost the civil court case proceedings (at least, before he went to prison).

Annuities that are placed inside an IRA or qualified plan have protections from creditors in various situations. But non-qualified annuities enjoy a large measure of this protection as well. 

What About Tax Treatment for the Death Benefit?

Some types of assets, such as stocks and bonds, have a cost basis that will automatically step up when they are passed to the heirs. This can substantially lower the tax bill the heirs will have to pay and allow them to liquidate these assets immediately if they need to.

Other types of assets such as annuities don’t have a step-up in basis when they are passed to heirs. So, annuities generally won’t have the same kind of tax advantage in this regard as assets like stocks and bonds. However, non-qualified annuities still allow for payments to the beneficiary to be made over the beneficiary’s lifetime.

One disadvantage that annuities have is that they aren’t privy to capital gains treatment. The income that is drawn out of an annuity is taxed as ordinary income, meaning that the income will be taxed at the beneficiary’s top marginal tax bracket.

Exceptions to the (Tax) Rules

The exceptions to this are when a portion of the principal that was invested in the annuity is withdrawn, and this amount is considered to be a tax-free return of principal.

Generally speaking, you will see this happen with an immediate annuity that has non-qualified money (in other words, after-tax dollars), meaning an exclusion ratio will be used to determine what is taxable.

Then, of course, any withdrawals from an annuity that is held inside a Roth IRA are never taxable. That is, unless the account owner is below the age of 59 .5 and no qualified exception applies.

If this is the case, then the withdrawal will be taxed as ordinary income and a 10% early withdrawal penalty will be assessed. 

Working Through Your Options for Your Legacy Goals

Annuities are fundamentally unique vehicles in the world of finance and estate planning. Their exemption from probate and creditors, along with their tax deferral for growth, make them attractive options for mature-aged individuals seeking an efficient way to pass on some of their assets.

If you have money that you want to leave to heirs and you are looking for a place that will keep those dollars protected and secure, you might well want to look at an annuity among the options that you explore. Your financial professional can discuss your situation in detail, explain the pros and cons of this vehicle, and help you determine what choices might be right for your goals.

Consult your financial advisor for more information about annuities and how they can benefit you and your heirs. If you are looking for a financial professional to assist you, many independent financial professionals are available at SafeMoney.com via just a few clicks of the mouse.

Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your situation and explore a working relationship. Should you need a personal referral, call us at 877.476.9723.

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