When it comes to estate planning and asset protection, trusts can be an incredibly valuable tool. However, with so many different types of trusts available, it can be difficult to know which one is right for you. In this article, we will take a closer look at four of the most common types of trusts: revocable living trusts, irrevocable trusts, testamentary trusts and special needs trusts.
A revocable living trust is created during the grantor’s lifetime and can be amended or revoked by the grantor (the person who creates the trust, also called a “trustor” or a “settlor”) at any time. This means that the grantor retains control over the assets in the trust and can change the terms of the trust as needed. The grantor also typically acts as the trustee, managing the assets in the trust.
Revocable living trusts are used for estate planning and asset protection. Because the assets in the trust are not subject to probate, a revocable living trust can save the beneficiaries significant time and expense. Additionally, a revocable living trust can be used to manage assets during the grantor’s lifetime and can be used to provide for beneficiaries upon the grantor’s death.
Another benefit of a revocable living trust is that it can provide for the management of assets in the event of the grantor’s incapacity. The trust document can contain specific instructions and provisions for the management of the trust assets in case the grantor becomes incapacitated and unable to manage the assets themselves. This can include the appointment of a successor trustee to manage the trust assets.
Incapacity management can be particularly important for those who want to ensure that their assets are managed in a way that is in their best interest, even if they are unable to do so themselves. It can also provide peace of mind to the grantor and their loved ones, knowing that the assets will be taken care of in the event of incapacity.
Revocable living trusts can provide privacy and avoid the need for a public probate process. Probate is the legal process through which a will is proven in court and assets are distributed to beneficiaries. Probate can be a lengthy and expensive process and often requires the assets to be made public. By placing assets in a revocable living trust, the assets are not subject to probate and the process is kept private.
It’s important to note that assets in a revocable living trust are still considered part of the grantor’s estate and are subject to estate taxes. Additionally, it’s important to keep in mind that a revocable living trust does not provide asset protection from creditors, lawsuits, or other legal claims.
An irrevocable trust, as the name suggests, cannot be revoked or amended once it has been created. Once assets are placed into an irrevocable trust, the grantor loses control over those assets and the trust becomes a separate legal entity. The grantor cannot change the terms of the trust or take back the assets without the consent of the beneficiaries. Additionally, an irrevocable trust can be used to protect assets from creditors, lawsuits, and other legal claims. Assets placed in an irrevocable trust are no longer considered part of the grantor’s estate, which can help to reduce estate taxes.
Another benefit of an irrevocable trust is that it can provide for the long-term financial security of beneficiaries. The trust can be structured to provide for the needs of beneficiaries over time, rather than all at once. This can be particularly useful for minor children or individuals with special needs, as it allows for the assets to be managed and distributed in a way that is in their best interest.
It is important to note that creating an irrevocable trust requires the services of an attorney who specializes in this area of law. The attorney will be able to assist with the drafting of the trust document, as well as with the selection of a trustee who is familiar with the management of trusts. Additionally, you should keep in mind that once assets are placed in an irrevocable trust, the grantor loses control over those assets and may not be able to access them in case of an emergency.
A testamentary trust is created through a will. Testamentary trusts come into existence upon the death of the grantor and require probate to be effective.
A testamentary trust can be used to protect assets. For example, a testamentary trust can be created to hold assets for the benefit of a beneficiary with a history of financial mismanagement. This can ensure that the assets are used for the intended purpose and not squandered. Similarly, testamentary trusts, like irrevocable trusts, are particularly useful for providing financial protection to the grantor’s vulnerable beneficiaries, such as for the care of minor children or long-term care for individuals with special needs.
Special Needs Trusts
A special needs trust allows individuals with disabilities to receive financial assistance while still maintaining their eligibility for government benefits such as Medicaid and Supplemental Security Income (SSI). Special needs trusts are designed to provide for the supplemental needs of individuals with disabilities, such as education, medical expenses, and recreational activities, without disqualifying them from receiving government benefits.
There are two types of special needs trusts: first-party and third-party. A first-party special needs trust is established with the disabled individual’s own assets, such as from a personal injury settlement or inheritance. A third-party special needs trust, on the other hand, is established with assets from a source other than the disabled individual, such as a gift from a family member or friend.
There are limits on the amount of assets that an individual with a disability can own for them to qualify for government benefits. One of the main benefits of a special needs trust is that it allows individuals with disabilities to receive financial assistance without affecting their eligibility for these benefits. Assets in a special needs trust are held in trust, and the trust is the legal owner of the assets. The disabled individual is the beneficiary of the trust, but they do not have direct access to the assets. Instead, the trustee is responsible for managing the assets and using them to provide for the supplemental needs of the disabled individual.
Summary of Trusts
|Type of Trust
|Revocable Living Trust
|A trust created during the grantor’s lifetime that can be amended or revoked by the grantor.
|A trust that cannot be amended or revoked once it is created.
|A trust created through a will that comes into existence upon the death of the grantor.
|Special Needs Trust
|A trust created for the benefit of an individual with a disability that allows them to receive financial assistance while still maintaining their eligibility for government benefits.
|Requires the services of an attorney who specializes in this area of law.
There are many different types of trusts available, each with its own unique advantages and disadvantages. It’s important to work with an attorney who specializes in this area of law to determine which type of trust is right for you.
A revocable living trust may be the right choice if you want to retain control over your assets and avoid probate. An irrevocable trust may be the right choice if you want to use the trust for estate planning and asset protection and don’t mind losing control over the assets in the trust. A special needs trust may be the right choice if you have a loved one with a disability and want to provide for their long-term care, and a testamentary trust may be the right choice if you want to provide for the long-term financial security of beneficiaries, minimize taxes, and protect assets through your will.
Trusts can be a powerful tool for achieving your estate planning and asset protection goals and working with an experienced attorney can help ensure that your trust is tailored to your unique needs and situation.