Types of Trusts
Are you confused about what a trust really is? A trust is a legal entity that takes ownership of your assets to protect them from predators and creditors. A trust is a contract between three individual or entities:
- The creator of the trust (the grantor);
- The trustee; and
- The trust beneficiary
Sometimes you can be all three.
Think of your assets - your home, investments, bank accounts, etc. - like boxes. If you are carrying all of these boxes in your arms and then drop them because you pass away, the executor of your estate will have to pick them up, but only after a probate proceeding. Probate can sometimes be lengthy and expensive and should be avoided wherever possible.
If you drop all of these boxes because you become incapacitated, they may be picked up by the agent named in your power of attorney, if you have one in place. Your agent will then have full authority over your assets. But if you didn't take care to limit your agent's authority when you created the power of attorney, this will be like handing him or her blank check.
Now, think of a trust as a shopping cart in which you place all of your assets. Once your assets are safely in the shopping cart, you create instructions and attach them to the handle of the cart.
You then go through life easily carrying your assets in the shopping cart. But if you can't push the cart along anymore, because you die or become incapacitated, your successor trustee will take hold of it and follow the instructions you left on the handle.
Trusts allow you to plan for a variety of life events and to dictate what should happen to your assets after you pass away. Most importantly, when trusts are properly funded, they can enable your estate to avoid estate taxes, bypass probate, and go directly to your heirs, saving a great deal of time and money.
There Are Many Different Types Of Trusts Available To You
There are many different types of trusts, all created to achieve different estate planning goals:
A Revocable Living Trust
A Revocable Living Trust - this trust is like an open box. You can put assets in and take them out whenever you want. Since you have full access to and control over the assets, they remain available to your creditors and predators. While a revocable living trust can help you avoid guardianships and probate, it won’t protect your assets.
A Testamentary Trust
A Testamentary Trust - is an irrevocable trust that is created upon the death of the grantor through the probate process. It is created by provisions in the grantor's last will and testament and is usually used to provide for minor children.
A Special Needs Trust
A Special Needs Trust - is a trust that is set up to provide support for someone who is disabled. A special needs trust also allows individuals to leave or transfer assets to a disabled beneficiary in a way so as not to disqualify them from much needed social benefits.
A Totten Trust
A Totten Trust - a type of revocable trust, also known as a "payable on death account". This type of trust arrangement is set up with a financial institution and provides that upon the grantor's death, the funds in the account will be transferred directly to a beneficiary, thereby avoiding probate. A Totten trust is normally used with bank accounts and other financial accounts, but cannot be used to transfer real property.
A Qualified Personal Residence Trust (QPRT)
A Qualified Personal Residence Trust (QPRT) - is an irrevocable trust whose only asset is a residence. A QPRT removes the value of your residence from your taxable estate and shelters its appreciation. It also provides the type of asset protection associated with irrevocable trusts, i.e. it can protect your residence from creditors.
An Irrevocable Living Trust
An Irrevocable Living Trust - this trust is like a closed box. Once you put assets in, you cannot take them out. This is a great trust to use if you need to minimize estate taxes, benefit charities, transfer a family business or vacation home to the next generation, or protect life insurance proceeds.
A Medicaid Asset Protection Trust
A Medicaid Asset Protection Trust - this trust is like a partially opened box. It is used to avoid having to spend down all of your assets in order to qualify for Medicaid. You can transfer your house, bank, and brokerage accounts into this trust while still living in your home and receiving dividends and income.
A Spendthrift Trust
A Spendthrift Trust - is an irrevocable trust that allows for greater control over the trust assets by limiting the beneficiary's access to the trust principal. A spendthrift trust is most often used to protect trust assets from beneficiaries who have the potential to squander them.
A Charitable Remainder Trust
A Charitable Remainder Trust - is a trust that is used by individuals looking to make philanthropic donations. It allows the grantor to receive yearly income from the trust for a specified number of years, and then upon expiration of the trust donate the remaining trust assets to a charitable cause.
A charitable remainder trust allows the creator to receive a charitable income tax deduction based on the value of the remaining trust assets. Another benefit is that the trust is exempt from all taxes unless it generates unrelated business taxable income. This trust is ideal for individuals who wish to dispose of highly appreciated and low-yielding assets free of capital gains taxes.
A Minor's Trusts
A Minor's Trusts - an irrevocable trust in which a minor is both the sole income and remainder beneficiary of the trust. Minor's trusts are often created to provide funds to a minor throughout their childhood or to manage and protect assets until the minor becomes an adult and can do so themselves.
For help with determining which type of trust is best for your estate planning goals, contact a knowledgeable and experienced estate planning attorney for a no-cost, no-obligation consultation.