What is a trust? Why you need one, and what kind might be best for you

You may have heard that trusts are a great way to protect your assets from probate. A trust can put your family or loved ones in a secure position after your passing. This article provides you with a basic introduction to trusts. Let this be your guide to which type of trust you may want to select depending on your situation. 

A trust is a legal arrangement involving three parties: the trustor, the trustee, and the beneficiary. The trustee, a third party, is appointed by the trustor to supervise the assets in trust for the benefit of the beneficiaries. If you are establishing a trust for the benefit of your children, and putting it in the care of your attorney, you are the trustor, your attorney is the trustee, and your children are the beneficiaries.

There are four main categories of trust which most types of trusts fall under: living trust, testamentary trust, revocable trust, and irrevocable trust.  A trust has more flexibility than a will. It can be used to provide for your children’s education, pets, charities, loved ones with special needs, protect assets, and do tax planning.

Living Trust vs Testamentary Trust

A living trust, also known as an inter vivos trust, is created during the lifetime of the trustor. The transfer of assets from the trustor’s estate to the trust happens while the trustor is alive, but the trustor can still access certain assets in the trust, such as cash and real estate property. The assets within the trust are not considered a part of the trustor’s taxable estate. They are not held in their sole name, they are not subject to probate once the trustor passes away. Therefore, a living trust allows you to keep your estate private and bypass the lengthy probate process. 

A testamentary trust, on the other hand, is created when the trustor passes away. It is created by a provision made in the trustor’s will that instructs the executor of the estate to establish the trust. However, if the will goes through probate, the establishment of the trust is significantly delayed. The assets in the trust are not protected from the probate process. There is a risk that property may not be distributed in the way that the trustor initially desired.  When the will is probated, the court will determine the validity of trust and it is established at that time.  The downside is that probate proceedings are generally public, so you lose the privacy that the living trust provides. By choosing to create a testamentary trust, the court’s involvement in the trust allows for greater oversight in what is going on inside the trust.

Revocable Trust vs Irrevocable Trust

A revocable trust means the assets in the trust are still under the ownership of the trustor. Any revenue created by the trust must still be reported on the trustor’s taxes. It also means that the trustor maintains the right to modify or “revoke” the trust at any time.  Most living trusts, mentioned above, are revocable.

This type of trust is usually set up to benefit the surviving spouse after the death of the trustor. Though this trust has obvious advantages in terms of the flexibility granted to the trustor, it also contains significant disadvantages. Trusts do not provide protection against creditors, and that assets in the trust are included under the wealth of the trustor for purposes of determining Medicaid eligibility. (To find out the steps involved to revoke a revocable trust, click here.)

When an irrevocable trust is established, the trustor relinquishes ownership of the assets in the trust while still living. The trust cannot be modified by the trustor without the permission of its beneficiaries. A testamentary trust is a form of becomes irrevocable when the trustor dies, but can they change the terms of it and the will that contains it, any time before death while they have the capacity.  trust because the trustor cannot make modifications to the trust. Although this type of trust may not seem like an attractive option at first glance, it offers tax advantages and asset security for those with large or complex estates.  

Why Should You Create a Trust?

Based on the discussion As you learn about the different categories of trusts mentioned above, it can be observed you will see that creating a trust may offer certain advantages in planning your estate. Though all advantages may not apply due to the uniqueness of each type of trust, you may want to consider setting up a trust if you are interested in:

Ensuring that your assets are managed for the benefit of your spouse or children according to your specific wishes, since, through a trust, you can control when and to whom distributions of your assets are made. 

Minimizing taxes and probate costs that are associated with transferring your assets through a will (applicable in the case of a living trust).

Protecting your assets and legacy, as a trust can help protect your estate from beneficiaries who may not be adept at money management, as well as from your heirs’ creditors.

Establishing a set of requirements that beneficiaries must meet if they wish to receive their inheritance.

If you find these advantages appealing, the next step is to look at what type of trust you should create based on your personal circumstances. 

The Trust for You

Trusts come in numerous forms, and each of them contains unique advantages, purposes, and legal conventions. If any of the below situations apply to you, click on the links for more information.

If you are a married couple, you may want to take a look at the following types of trusts:

Marital Trusts – also known as the “A” Trust

Bypass Trusts – also referred to as the “B” or Credit Shelter Trusts

Qualified Domestic Trust

QTIP Trusts

Are you looking for a trust that lowers your taxable income and helps you qualify for benefits? Refer to the following types:

Medicaid Trusts

Special/Supplemental Needs Trusts

Grantor Retained Income Trust

Would you like to create a legacy of giving within your estate plan by donating to charity? There are two types of charitable trusts to consider:

Charitable Lead Trust

Charitable Remainder Trust

Want ike to protect your assets from paying an estate tax twice? Leave them to your grandchildren instead of your children using a Generation-Skipping Trust. 

Concerns about your children misusing your assets? You should take a look at the Spendthrift Trust. 

Want a simple and flexible way of removing funds from your estate? Establish a Totten Trust. 

Would you like more control over your insurance policies and the money that is paid from them? Create a Life Insurance Trust

Need to lower estate taxes on your home? Look into a Qualified Personal Residence Trust.

Are you a victim of a crime? You can establish a constructive trust.

If you’re a politician or corporate executive or have other complicated relationships with your investments, consider a blind trust.

Want to ensure that your beloved pet is taken care of after your death? Consider a Pet Trust. 

You can create more than one trust, but you should consult with a professional before deciding to do so.

If you have any questions or require additional assistance, please consult our concierge service here at Peacefully. The concierge service can help with referrals to trusted professionals, offering case-specific advice, recommendations, and coordination. For more about our concierge service or to schedule a free consultation, click here.