Trusts are an important aspect of estate planning that ensure your right to determine how your assets will be managed, both during life and after you pass away. There are many different types of trusts, and each one has its benefits when used in the right situation.
What Is a Trust?
A trust is a legal arrangement between two parties, known as a trustee and a grantor. The grantor -- also commonly referred to as a settlor (and sometimes trustor)-- is the person who establishes the trust and transfers assets to it, while the trustee is the person or entity responsible for managing those assets in accordance with the grantor's wishes. Like a will, a trust can have beneficiaries, including the grantor's spouse and children, or even a charitable organization. The types of assets that are most often placed in trusts include:
- Real property, such as homes, land, or investment real estate
- Deposit accounts at banks or credit unions
- Business interests and assets
- Collectibles and antiques
- Stocks, bonds, money market accounts, and other investments
- Life insurance policies
Who Needs a Trust?
There are many reasons for establishing a trust. Those who do it often wish to:
- Pass on assets at the end of life without subjecting beneficiaries to probate
- Create a plan for managing assets in the event the owner of those assets becomes incapacitated
- Set aside assets that can be used to care for a child, sibling, or another dependent with special needs
- Establish requirements that beneficiaries must meet in order to access their inheritance
- Preserve assets to be used in the care of minor children upon the grantor's death
- Keep money “in the family” - i.e. make sure if the spouse remarries or child gets divorces that money held within trust remains safe.
- Protect children from creditors.
- Reduce estate and gift taxes that beneficiaries will owe upon receipt of their inheritance.
Common Types of Trusts
There are many types of trusts that can be created. Here are four of the more common types:
As its name suggests, a revocable trust -- also known as a living trust -- allows the grantor to transfer the title of a property to a trust in which he or she is the initial trustee and permits that individual to remove the property or add additional properties to the trust while alive. When the grantor dies, the assets can go to named beneficiaries without probate (or can remain in the trust subject to restrictions). However, while this action will protect against probate, it is not a complete form of asset protection while the grantor is alive as the assets are still within the reach of creditors. Generally, a revocable trust will evolve into an irrevocable trust upon the death of the grantor. In other words, when the grantor passes, away, the beneficiary’s creditors will be unable to access the trust funds.
One of the main benefits of this type of trust is its flexibility. The grantor can name himself or herself as a trustee or co-trustee, and to appoint someone else to act as a successor trustee when he or she passes away or when they become incapacitated.
Irrevocable Trust (AKA: Asset Protection Trust)
Irrevocable trusts are, as the name suggests, virtually unable to be altered or revoked after creation. Once property is transferred to the trust, no one -- including the grantor -- is able to remove it from the trust. The benefit of this type of trust is that it protects the asset from creditors, other beneficiaries, or even government assistance programs, such as Medicaid, who often claim assets to provide long-term care coverage and other benefits.
If the grantor is looking for creditor protection or wants to engage in preemptive Medicaid planning, irrevocable trusts are the way to go.
This type of trust can also remove assets from the estate to protect beneficiaries from estate or gift taxes.
Asset Protection Trust
Asset protection trusts are generally created so that they are irrevocable and provide that the grantor is not a current beneficiary for anything other than income. Here is some more information about Medicaid Asset Protection Trusts.
Special Needs Trust
Many times, those who have special needs receive benefits from governmental organizations, including Social Security Income or Medicaid. Unfortunately, because these programs are “needs-based,” receiving assets through inheritance, personal injury settlement, lottery winning, gift, or other windfalls, will impact the amount of Medicaid or SSI benefits this individual is able to receive. A special needs trust is a legal way to provide luxuries or other benefits that the individual would not normally be able to receive and remain eligible for benefits. The special needs benefits that can be made available through the trust include items such as:
- Medical and dental expenses
- Education and educational equipment
- Transportation, vehicle insurance, and maintenance
- Essential dietary needs
- Spending money
- Entertainment expenses: new TV, tickets to the theater, etc..
- Payments for a companion
- Items intended to increase the individual's self-esteem
Generally, this type of trust includes a provision that will terminate the trust if it places the individual in jeopardy of losing his or her benefits.
Consultant with an Experienced Florida Estate Planning Attorney Today
Estate planning can be a complicated process to navigate alone. Working with an experienced estate planning attorney is a worthwhile decision when determining which types of trusts you should set up. For further guidance in your estate planning process, consult with an experienced estate planning attorney today.