A trust is a legal entity that is able to own property and other assets. It works in conjunction with a well-drafted will. It is established by a legal document that defines how money and other assets to be managed. There are many different types of trusts, and some come into effect before you pass away. Trusts are a great way to ensure that your hard earned money is used wisely and for goals you value. They are also an important tool for parents and grandparents of young children. A trust can be established to provide a steady source of financial support for a child until they reach adulthood. Trusts can also be used to lessen tax burdens on your heirs and to simplify the probate process once you pass away.
Trusts are typically either revocable or irrevocable depending on whether you can choose to alter or terminate the trust during your life. Within those two broad categories there are many variations, including:
- Living trusts (often called Family Trusts or Inter Vivos Trusts)
- Testamentary trusts — a trust that comes into being after you pass away
- Special needs trusts — created to provide financial support for a disabled person without impacting that person’s ability to receive social security and other asset-sensitive governmental benefits
- Qualified Terminable Interest Trusts (“QTIP”) — created to provide support for a surviving spouse, but also maintains control over the distribution of assets after that spouse has also passed away
- Bypass trusts — created to take full advantage of the marital tax exemption and allow a deceased spouse’s assets to be used to benefit a surviving spouse without subjecting the assets to potential double taxation when the surviving spouse also passes away. In Maryland, anyone with assets over $1 million (including real estate, and certain life insurance policies, investment accounts, 401(k) or 403(b) plans, and other retirement savings) should strongly consider a trust to avoid unnecessarily paying Maryland’s estate tax.