Estate and Trusts: Understanding the Difference and Types of Trusts

At Pillar Wealth Management, we offer holistic solutions that help you manage your wealth, minimize taxes, increase your net worth, and prepare an estate plan. We are a fiduciary advisory firm that works with clients willing to invest $5 million to $500 million in financial assets. Our team has a collective experience of 60+ years in various wealth management areas. Talk to us today in a free session!

This blog reviews:

• How estate and trusts work

• What is the difference between an estate plan and a trust?

• What are the three types of trust?

• Who owns the property in a trust?

Let’s begin.

Table of Contents
What Is Estate Planning? What Goes In an Estate Plan? How Is an Estate and Trusts Different? Who Owns The Assets Held in a Trust? How Can Wealth Management Amplify the Benefits of Estate Planning? Wrapping It Up

What Is Estate Planning?

Estate planning refers to preparing tasks that allow you to manage your asset base in the event of your incapacitation or death. It identifies the heirs that your assets will be transferred to and develops a plan to settle your estate taxes. You usually need to work with an estate planning attorney to develop this plan. You can also seek help from a wealth manager to ensure your assets are distributed as per your wishes.

What Goes In an Estate Plan?

A typical estate plan includes some combination of the following:

1.    A Last Will and Testament

This is a legal document that communicates who will receive your various assets. These individuals are called beneficiaries. If your children are under 18 years old, then a will can also identify their guardian. Besides this, your will identifies the executor in charge of overseeing that your estate plan is carried out as per your wishes.

2.    A Power of Attorney (POA)

A POA(power of attorney) is a legal document that grants an individual the power to take decisions on behalf of another individual (known as the principal). They manage their financial affairs, such as paying bills, making legal decisions, managing investments, and making business decisions.

A power of attorney can be revoked if the principal dies or revokes it. It can also end if a court invalidates the document or the person can no longer carry out the tasks and responsibilities required.

There is also a medical power of attorney. This allows an agent to make healthcare decisions if you (the principal) can no longer make them. 

3.    A Living Will

This legal document outlines your wishes for the type of end-of-life medical care that you want to receive. For example, you may not want to be resuscitated, or you may want to be removed from life support machines. It allows you to make these decisions when you are incapacitated.

4.    A Trust

A trust is a method that lets you transfer your assets to a beneficiary. It comprises three parties. The first is a trustor, i.e., the individual who originally owns the assets, the second is a trustee, i.e., a person who holds the assets or the property in a trust, and finally a beneficiary. A beneficiary is a person who will benefit from the assets held in a trust.

You can use a trust to control how and when the distribution of your assets will take place. It can also be used to eliminate or reduce estate taxes.

Some of the key benefits of developing an estate plan include:

• It works as a safety net that can preserve your assets and help retain their value.

• It can reduce disbursement times and allows your assets to be distributed more quickly.

• It lets you name beneficiaries and stay in control of who will receive your assets if you die or become incapacitated.

• As mentioned above, estate plans often have a living will, a healthcare proxy form, or a durable power of attorney. These documents let you choose who can make decisions on your behalf if you become incapacitated. You can assign this responsibility to a friend or a relative you trust. They can manage your legal and financial affairs. With a living will, they can also make healthcare decisions on your behalf.

To learn about estate planning, talk to a wealth manager at Pillar Wealth Management.A wealth manager can guide you on the various strategies that can help you protect the value of your assets. You can order a free hardcover copy of our book to learn about this: The Art of Protecting Ultra-High-Net-Worth Portfolios and Estates – Strategies for Families, Worth $25 million to $500 million.

How Is an Estate and Trusts Different?

Now that you know what goes in an estate plan, let’s take a moment to understand what is the difference between an estate plan and a trust.

An individual’s estate refers to the entire collection of assets that fall under their ownership.  Your estate will comprise everything that contributes to your net worth. This includes:

• All land and real estate

• Financial securities and investments

• Cash

• Possessions

• Collectibles

• Furnishings

• Intangible assets

Basically, if you have a controlling interest in something, it will be a part of your estate.

On the other hand, a trust is a type of legal vehicle. It allows a trustee to hold and direct your assets in a trust fund. These assets are meant for a beneficiary. You can choose multiple beneficiaries here. The key difference between an estate and a trust is that an estate carries the entirety of your assets. On the other hand, a trust can carry some or all of your assets. This depends on you and the estate plan you have drawn. A trust can be created by people from different types of economic backgrounds. Even if you are not a high-net-worth or ultra-high net worth individual yet, you can create a trust. For instance, many grandparents and parents create trust funds for their children to get a college education.

If you want to learn about estate planning and trusts, request a copy of our book, 7 Secrets to High-Net-Worth Investment Management, Estate, Tax, and Financial Planning.

Who Owns The Assets Held in a Trust?

It’s also important to understand who owns the property held in a trust. As per trust law, the person declared as the trustee is the legal owner of the property in a trust. They act as a fiduciary to the beneficiary(s) and must manage the trust to benefit these individuals. The beneficiary(s) is also considered as the equitable owner of the trust. Deciding who owns the assets held in a trust also depends on the type of trust you are dealing with. Let’s take a closer look at this.

What Are The Three Types of Trusts?

Now that you have a basic understanding of trusts let’s take a look at what are the three types of trusts.

1.    Revocable Trust

A revocable trust is a type where the trustor retains control of the assets held in the trust during their lifetime. They are the legal owner of the trust’s assets. As a result, they are responsible for managing taxes on the income these assets earn. The trust can also be subjected to estate taxes if the value of its assets exceeds the tax-exempt threshold at the time of the trustor’s death.

Besides this, the trustor can alter the trust during their lifetime and change it as per their wishes. Once a trustor dies, a revocable trust converts into an irrevocable trust.

2.    Irrevocable Trust

This is a type of trust where the trustor transfers the legal ownership of the property held within the trust to a trustee. They cannot modify the contents of the trust during their lifetime and may not be able to change the beneficiaries of the trust. The trust cannot be revoked after their death, as well. Since a trustor cannot move around the assets of this trust and have no control over them, they have to pay little to no taxes on these assets. This can reduce the tax burden associated with their estate. As a result, an irrevocable trust can be more tax efficient.

3.    Testamentary Trust

The third type of trust is the testamentary trust. This type of trust works differently from revocable and irrevocable trusts. You can create these trusts during your lifetime and fund them. For a testamentary trust, this is created through a will after the trustor dies. It is also known as a “trust under will.”

The terms and conditions of this trust are defined in your Last Will and Testament. They are usually used to establish a trust for minor children. The assets in this trust can be subject to probate, which can be costly. However, it also offers a certain amount of flexibility which can be useful.

You can use this trust to preserve assets for children you have had from a previous marriage. It can also protect the financial future of your spouse by being a source of lifetime income. Besides this, people also create these trusts for beneficiaries having special needs. They can gift them to charities, as well.

If you want to learn more about the benefits of each trust type for wealth management and estate planning, talk to a wealth manager at Pillar Wealth Management.

How Can Wealth Management Amplify the Benefits of Estate Planning?

Besides an estate planning attorney, you can also choose a wealth manager to help you with estate planning. A wealth manager offers a more holistic set of services that go beyond estate planning and also include:

• Retirement planning

• Tax planning

• Asset allocation analysis

• Insurance planning

• Risk management

With a wealth manager by your side, you can:

Grow the Value of Your Estate

One of the benefits of a wealth manager is that they don’t just help you manage your estate. They also help you increase your net worth and add more value to your estate. They can analyze your financial situation and prepare a comprehensive plan for investment management that allows you to increase your wealth over a given period.

They can help you invest your assets in suitable financial securities that let you achieve your goals. They can also assist you in revising your current portfolio to improve its performance. To learn about this, read our guide on how to enhance portfolio performance.

Develop Personalized Strategies

There’s no standard solution to estate planning and wealth management. A qualified wealth manager (such as the ones at Pillar Wealth Management) can create a tailored strategy based on the assets you hold and your financial goals. You can use these strategies to get more use out of your assets, achieve better outcomes, and secure your financial legacy.

Control your Estate Taxes

A major benefit of working with a wealth manager is that these individuals are well-versed with tax minimization tactics. They can help you leverage tax shelters and employ strategies that lower your tax burden. This can be done by creating an irrevocable trust, generating long-term capital gains, using short-term capital gains to offset capital losses, etc.

Simply put, the wealth managers at Pillar Wealth Management can help transform your perspective on how to manage your assets. To learn more, read our guide on 5 critical shifts that can improve portfolio performance.

Wrapping It Up

Understanding how estate and trusts work is essential to comprehensive estate planning. Knowing about the difference between estate plans and trusts and the different types of trusts can also help you manage your assets in a better way.

If you want to take your estate planning to the next level, reach out to Pillar Wealth Management. We work with individuals ready to invest $5 million to $500 million in liquid assets and can help them achieve financial serenity.

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