As a legal document created during someone's lifetime, a trust gives designated beneficiaries the right to assets that one person controls. The trustee holds title to all the assets placed in a trust, while the beneficiaries receive the assets established by the legal language that creates a trust.
Not all trusts are created equal, making it essential for you to understand the types of trusts for estate planning.
Revocable vs. Irrevocable Trusts
The grantor of a revocable trust has the right to change the language written into the trust. Often referred to as a living trust, a revocable trust allows the grantor to transfer the title of an asset to a trust. The grantor also serves as the first trustee. During their lifetime, the grantor can add to or remove assets from a revocable trust.
On the other hand, an irrevocable trust prohibits the grantor from modifying the trust in any way. Once assets transfer into an irrevocable trust, no one can make any changes to the asset composition of the trust.
Asset Protection Trust
An asset protection trust (APT) protects the grantor's assets from the claims of creditors and lawsuit settlements. Grantors typically establish APTs to be irrevocable for a certain number of years to ensure the grantor is not a current beneficiary of the assets placed in the trust. An APT is usually structured to return the undistributed assets to the grantor after the trust termination if there is no risk of the assets being claimed by a creditor or lawsuit settlement.
A charitable trust benefits a specific charity. They are created as a part of an estate plan to reduce or avoid gift and estate taxes. As a popular type of charitable trust, a charitable remainder trust (CRT) can act as an effective financial planning tool that gives the grantor valuable financial benefits for a lifetime.
Special Needs Trust
Some beneficiaries of trusts receive government benefits. Once named a beneficiary of a trust, the beneficiary can lose the government benefits unless a grantor establishes a special needs trust. Considered legal because it follows the rules created by the Social Security system, a special needs trust prevents the beneficiary receiving government benefits from having any control over the distribution of assets.
Established to prevent a beneficiary from selling or pledging a trust's financial assets, a spendthrift trust is a popular financial planning tool for controlling the spending of an irresponsible heir. In a spendthrift, the named beneficiary receives full asset protection from creditors until the trust releases the assets at the legally documented time.
A grantor sets up a Totten trust by depositing money into an account set up at a financial institution. The grantor uses their name as the trustee for the benefit of a beneficiary. This type of revocable trust does not release assets until the grantor dies or if the grantor releases the assets while still alive. When the grantor dies, the assets remaining in the trust do not go into probate.
Discover Which Type of Trust Works Best for You
Creating a trust protects your family's assets to ensure loved ones are taken care of financially after your death. Deciding which trust works best for you requires an in-depth review of your current finances, as well as determining what your family will need for future financial security.
By working with an experienced estate planning attorney, you can discover which type of trust works best for your financial goals. Schedule a free consultation with the Cloud Peak Law Group to learn more about the different types of trusts for estate planning.