When you begin looking at different types of trusts, it can feel overwhelming and confusing. People utilize trusts differently, and various types will accomplish other goals.
Working with an experienced estate attorney who can review the various benefits and types of trusts is essential. It will ensure you establish a trust that benefits your heirs and estate.
Let’s outline what a trust is, the main goals of a trust, the common types of trusts, and the benefits of each kind.
Understanding Trusts
A trust is a legal document that creates a virtual container and allows a third party, the trustee, to manage assets for the benefit of another individual or entity called the beneficiary.
The individual who sets up the trust is called a donor, grantor, or settlor. Once the assets are transferred to a trust, they belong to the trust, not the trustee. The trustee will hold the title to the trust property; however, they need to follow the specified guidelines of the trust document as well as the Uniform Trust Code. Would a will or a trust be better for you? Consult an estate planning attorney.
Benefits of Setting Up a Trust for Estate Planning
Each type of trust is designed to benefit your estate and beneficiaries in various ways. However, some disadvantages may not work for your estate plan, so it is essential to consult with an experienced estate planning attorney to help determine which one is best for you.
- Any assets placed in trust will avoid the probate process at the time of death and can be immediately distributed. When a pour-over will is in place, all assets will transfer into the trust upon the death of the grantor.
- In many contexts, assets in the trust aren’t considered as part of the taxable estate and may minimize the value of the estate, possibly eliminating or minimizing gift and estate taxes.
- Ensuring the privacy of financial matters at the time of death
- Ensure the care of minor children upon your death
- Set up care for a special needs dependent
- The trust is a separate asset of the beneficiary and not part of any community property unless the beneficiary decides to include it
- It gives the settlor control of how and when the beneficiary will receive their inheritance.
A Revocable Living Trust
A revocable living trust generally allows the settlor to act as the initial trustee and transfer and remove assets from the trust while living. The revocable trust becomes irrevocable upon death and isn’t subject to probate, meaning all the assets transferred into the trust will go directly to the beneficiary. A revocable trust also makes it very difficult for creditors to claim any assets to cover any outstanding debts left behind.
Disadvantages of a Living Trust
A living trust has two significant disadvantages, making it a poor choice for some people.
- A revocable trust won’t protect your assets as they remain accessible to the grantor and the trustor’s creditors.
- A revocable trust could create issues with the trustor’s ability to receive medical assistance or social security aid with long-term expenses, if necessary, as they age.
Irrevocable Trust
The irrevocable trust can be established while the trustor lives or after death. Property and assets transferred into the trust cannot be removed, and the trust is managed by a trustee. An irrevocable trust may protect assets from creditors, beneficiary claims, or Medicaid. If you have a large estate, consult an estate planning attorney to determine which kind of trust is best for your circumstances.
The most significant disadvantage of an irrevocable trust is that you can’t change it and only the trustee has authority to transfer assets out of the trust.
Types of Special Trusts
Many people have unique circumstances to consider when establishing a trust, and there are many options to consider when choosing which type is best for you to ensure your estate and loved ones are cared for as you would like. An estate planning attorney in Alabama can help review the advantages and disadvantages of each type of trust to determine the best one in your estate planning process.
#1. Charitable Trust
Should you want to create a legacy of gifting, you can establish two different charitable trusts.
- A charitable remainder trust allows you to receive income from assets for a specified period, with any remaining income or assets transferring to a charity of your choice.
- A charitable lead trust will allow you to designate specific assets to a charity or multiple charities of your choice, with the remainder of your assets going to the beneficiaries after your death.
#2. Marital Trust
Also known as an “A” Trust, a marital trust Is created by one spouse for the benefit of the other spouse. A marital trust allows the surviving spouse to avoid paying estate taxes on assets; however, the surviving spouse as beneficiary would be required to pay any required estate taxes on any remaining trust assets that could eventually be passed to them.
#3. Generation-Skipping Trust
Should you leave your assets to your grandchildren, you can establish a generation-skipping trust so your children don’t have to pay estate taxes on those assets and still maintain the option to access income generated by the assets.
#4. Bypass Trusts
Married couples can establish a bypass or credit shelter trust, also called a “B” trust will help reduce the estate tax impact for beneficiaries. It is an irrevocable trust that will transfer any assets directly to the surviving spouse. The assets are managed by a trustee, which keeps the assets out of the spouse’s estate. Any remaining assets will go to their beneficiaries upon the surviving spouse’s death, and there will be no estate tax.
#5. Grantor Retained Annuity Trust (GRAT)
A GRAT is a type of trust that can be utilized to minimize taxes on financial gifts to your beneficiaries. With a grant, you can transfer the assets you want as a gift, and then you will then continue receiving annuity payments based on the original value of your assets regularly. It is designed only to be set up for a certain amount of time, and once the term ends, any remaining funds will be transferred to the beneficiary without any gift tax being required.
#6. Life Insurance Trust
This irrevocable trust holds life insurance proceeds upon your death, and the trustee will manage the proceeds for the beneficiaries. The advantage of an irrevocable life insurance trust is that your heirs will avoid estate taxes on any life insurance payout. In other words, the life insurance proceeds are not includable for estate tax purposes.
Should you be worried about your beneficiaries spending their inheritance frivolously, a spendthrift trust will allow you when and how the beneficiaries can access the trust assets.
#8. Special Needs Trust
This trust will provide financial support for a special needs dependent such as a sibling, parent, or child. In addition, it will allow them to continue receiving government benefits for their disability.
#9. Testamentary Trust
Also, known as a will trust, it is established through a last will and testament, and upon death, this trust becomes irrevocable. It’s designed to ensure that your beneficiary can only access assets in the trust at a specified time.
#10. Totten Trust
A Totten trust is set up through a bank account or other financial institution, also known as a payable-on-death account. After your death, the money you deposited into the account is transferred to the named beneficiary. The benefit to this type of trust is that it’s straightforward to set up, and there is no upfront cost; however, the downside is that the money in this account is still accessible to creditors.
Estate Planning You Can Trust
At Brackin Law Firm, we have decades of experience working with high-earning individuals and families. We can help you whether it’s a straightforward trust for an individual or family or a complex, high-net-worth estate plan Involving multi-faceted structuring, lifetime giving, and irrevocable trust strategies. At Brackin Law Firm, we will help you protect your family legacy and provide you with estate planning and trust solutions.
Contact us today, and we will get started helping you to prepare your estate planning needs.