It is important to create an estate plan to assure that your assets will be managed the way you want them to be, both during your lifetime and once you have passed. The most common end-of-life preparation is the will. However, wills can be contested and typically go through probate.
Another way that people can transfer their assets is through a trust. There are various types of trusts, and knowing the differences can help you make informed decisions on what type will work best for your financial needs. This article will explore what a trust is, trust terminology, the four main types of trusts, and the most commonly used trusts.
What is a Trust?
A trust is a fiduciary arrangement that allows a third party person, known as a trustee, to hold assets for a beneficiary or beneficiaries. Trusts typically avoid probate which means that the beneficiaries gain access to the assets quicker than if they were transferred via a will.
A trust is a legal process that makes the transfer of assets to your beneficiary easy and hands-free. Typically, there are no additional fees for gift taxes because a trust arranges an indirect bequest of assets to your selected beneficiary. Since gift taxes can be avoided this way, it is a great option if assets exceed the annual gift tax exclusion limits.
Listed below are the types of assets that can be transferred through a trust:
- Homes, Land, or Investment in Real Estate
- Deposit Accounts through Banks and Credit Unions
- Stocks, Bonds, and Money Markets
- Life Insurance Policy
- Business Interests and Assets
- Collectibles and Antiques
Terms of the Trust
When discussing trusts, there are a few terms that are helpful to understand.
Grantor: The person who sets up the trust.
Trustee: The person, or institution, responsible for the trust.
Fiduciary: A person, or institution, who acts in the best interest of another person.
Beneficiary: The person the grantor names to inherit their estate in the trust document.
Remainder Beneficiary: A secondary person that received the remainder of the grantor’s estate after certain assets have been distributed.
Common Types of Trusts
There are four main types of trusts:
People create this type of trust when they are still alive to ensure that the process of transferring funds to their beneficiaries is as efficient as possible. A living trust typically avoids probate which can save beneficiaries from court fees, excessive estate taxes, and substantial stress.
This type of trust is set up post-death and is based on your last will. Usually, the last will is detailed enough to produce a testamentary trust. A plus to this type of trust is that your will can be edited countless times up to your death.
A revocable trust is also a living trust because the terms can be changed at any point during the grantor’s lifetime. This is typically used to avoid probate with the transfer of assets post-death.
An irrevocable trust can not be altered once it is created. This is typically created so that the benefactor can transfer assets out of their estate. Income from the assets is no longer taxable to the benefactor during their lifetime and is also not taxable to the estate once the benefactor passes away.
Common Types of Charitable Trusts
A charitable trust is an irrevocable trust that is set up to benefit you, your beneficiaries, and a qualified charity. There are two main types of charitable trusts:
Charitable Lead Trust
This is often referred to as a charitable lead annuity trust or CLAT. It is created to provide financial support through an annuity to the chosen charity, or charities, for a pre-established amount of time. The remaining assets will go to selected beneficiaries once the pre-established amount of time has passed.
Charitable Remainder Trust
This is often called a charitable remainder annuity trust (CRAT). This is the opposite of the CLAT previously discussed. The CRAT creates an income with an annuity for you and your beneficiaries for a specified amount of time. Once that time has passed, the remainder of the assets will go to charity.
Other Types of Trusts
Asset Protection Trust (APT)
An APT is used to protect an individual’s assets from creditors, lawyers, and any judgments against the estate. This type of trust offers the most protection from creditors because it is irrevocable.
Credit Shelter Trust (CST)
A CST is also called a bypass trust or an AB trust. It is an irrevocable trust used by married couples that immediately transfer assets directly from one spouse to another when one spouse passes away.
The surviving spouse does not hold the assets directly because they have a trustee to manage them. When the surviving spouse dies, any remaining assets will then be passed on to a designated beneficiary. This is often used to maximize estate tax exemptions.
Irrevocable Life Insurance Trust (ILIT)
An ILIT is created in an insured’s lifetime that has a term or permanent life insurance policy. This trust will manage and distribute assets upon the death of the insured. Distribution has been previously established during estate planning.
ILIT protects the insured’s benefits from estate taxes. It is important to note that once this trust is created, it can not be modified or canceled.
Special Needs Trust (SNT)
A Special Needs Trust SNT is typically created for a family member that has a disability and who is eligible for government benefits. This type of trust does not interfere with the individual’s government assistance. The SNT is an excellent way to help disabled individuals with medical expenses, medical care, and transportation costs without risking their government assistance.
The generation-skipping trust allows the transfer of assets to skip your children and be awarded to your grandchildren. This allows your children to avoid estate taxes while simultaneously having the option to allow your children access to any income that the assets produce.
A spendthrift trust allows you to decide when and how your beneficiaries can access their inheritance. The purpose of this trust is to prevent the misuse of assets.
A Totten trust is also known as a payable-on-death account. This enables a beneficiary to directly receive assets upon the death of the grantor. The grantor can add/withdraw funds from the trust at any time while they are alive. The grantor is also able to make changes to the beneficiaries as desired.
How to Determine What Type of Trust You Need
As you can see, there are many benefits to estate planning. You may find that one of the above-mentioned trusts feels like a good fit for your financial situation. However, trusts can be complicated and may not be the best fit for everyone. It is imperative to speak with an attorney to review your particular situation and to assist in your estate planning needs.
Work with an Experienced Estate Planning Attorney to Set Up a Trust
From avoiding probate to making the transfer of assets easy for your beneficiaries, there are many benefits to creating a trust. If you are planning your estate and are looking for an experienced attorney to help, call The Legacy Lawyers at (800) 840-1998 to schedule a consultation today.