Trusts can be a smart estate planning tool to supplement a valid Will. There are several different types of trusts you can establish, and the right one(s) for your needs will depend on: (1) how and when you want your beneficiaries to inherit what you leave them; (2) the types of assets you want them to inherit, (3) any unique issues that may exist for you or one of your beneficiaries, which may include a family pet; and (4) your overall long-term planning goals to protect yourself and your loved ones.
When should you consider a trust?
While nearly everyone needs a Will, not everyone benefits from the creation of a trust. They are two independent estate planning tools that work in tandem with each other to ensure a smooth transfer of assets upon an individual’s death.
A trust is a good option for individuals who want to keep certain assets out of probate court. In addition, a trust can help you appoint someone to manage assets on behalf of your minor children should you pass away before they reach adulthood, or on behalf of others depends who would be otherwise unable to care for themselves. A trust can also provide a unique tool for protecting a unique beneficiary such as a child with special needs or even a family pet.
What types of trusts exist?
Trusts involve a grantor (sometimes also called a “Settlor” or a “Trustor”), which is the person who creates and funds the Trust. Then there a Trustee, which can be the original grantor or another person, or even a bank (sometimes called a “corporate trustee”), which manages the trust assets in accordance with the terms of the Trust Agreement. Lastly, there are the beneficiaries, which can be the original grantor, the grantor’s children or other named persons, but can also be a pet or charitable foundation – the one intended to benefit from the Trust.
A trust can be created and implemented while the trust maker is alive, known as a “living trust.” A trust can also be created through a Will, and is funded from the probate assets after the death of that person, which is called a “testamentary trust.” This type of Trust only takes effect at the death of the testator (the one who signed the Will).
Common types of trusts include:
Revocable trusts
Revocable trusts (sometimes called a revocable living trust or an inter vivos trust) are created during the lifetime of the person making the trust. They can be modified or revoked at any time while the trust maker is alive. Assets that are passed to beneficiaries through a revocable trust are not subject to probate and can save your loved ones a lot of time, money, and hassle. However, a revocable trust is not ideal for asset protection, as all assets allocated to the trust may still available to the trust maker’s creditors depending on how the terms of the trust are drafted and what powers are given to the trustee.
Irrevocable trusts
An irrevocable trust cannot be modified or revoked once it is created, not even by the trust maker (except in rare instances). Assets that have been transferred to an irrevocable trust are protected from any judgments or lawsuits, but you also lose all control over those assets once they are placed into the trust.
Special needs or supplemental needs trusts
A special or supplemental needs trust (also known as a “third-party trust”) is usually created for a beneficiary with physical and/or mental disabilities to protect the assets you intend to leave that person. When properly drafted, a special needs trust allows your beneficiary to receive supplemental support above and beyond (and totally separate from) the government benefits they receive as an individual with special needs. This is important, as your loved one may not qualify for those federal benefits if they inherit assets through a Will.
Asset protection trusts
An asset protection trust (also known as a “spendthrift trust”) is ideal for protecting an individual’s assets from future creditors or claims. Typically, this type of trust is irrevocable for a defined period of time and is established with a beneficiary other than the trust maker. Once this period is over, the trust can be terminated and any assets that have not been distributed are usually returned to the trust maker.
Charitable trusts
A charitable trust is usually established to benefit a specific charity as part of an estate plan. Creating a charitable trust can also be used to reduce gift and estate taxes.
Pet trusts
A pet trust ensures that the trust maker’s beloved pet is cared for after their death. Since assets cannot be transferred directly to a pet, a chosen caregiver is named as the trust’s beneficiary and instructed to use the trust’s assets to finance the care and well-being of the pet.
Get help exploring your trust and estate planning options
To learn more about whether a specific type of trust is right for your estate planning needs, schedule a free consultation with the Law Office of Patricia E. Tichenor. We will walk you through the basics of trusts and how they can help you provide for the people, pets, or causes that are important to you.
