During your lifetime you work hard to build wealth and provide for your family. You recognize the importance of careful planning for the future by investing your money. Maybe you have planned for college savings for your kids or set up retirement funding for yourself into the future.
Let’s face it, nobody likes to consider life for their heirs after they die. Yet, it’s an important part of planning for the future. You might be wondering with all your planning if you should set up a trust.
There are so many types of trusts, how do you know which is right for you? You might already have a will, but do you need a trust?
An important component of estate planning is to establish a trust to protect your interests and your heirs into the future. Read on to learn more about the different types of trusts so you can decide what’s the best fit for your needs.
What Is a Trust?
Let’s start with some understanding of the term trust. First, it’s important to understand some of the players involved with a trust.
A trustor is a person who’s creating the trust. They are the ones who will put assets into the trust and make decisions about its setup. The trustee is the person who is given the responsibility of carrying out the business of the trust and acting on behalf of the trustor.
The beneficiary is who gets designated to receive assets from the trust.
The trustee will act to care for and distribute assets from the trust once the trustor is no longer living.
So, the trust is the legal document that’s part of an estate plan to care for assets during the trustor’s life and after they are no longer living.
Advantages to Trust Planning
There are many different types of trusts to use when estate planning. You can use the different trust options depending on your needs in estate planning and those of your beneficiaries.
There are some real advantages to estate planning to consider including:
- Avoid probate court upon the trustor’s death and pass assets to heirs
- Manage assets during life, even if the trustor is unable to do it
- Asset management for heirs who might have special needs
- Provide guidelines for how heirs will receive assets from the trust
- Establish how assets will be managed for minor children
- Reduce estate taxes
As you start estate planning, you’ll need to consider your goals for the future and how you expect your assets to be handled.
Different Types of Trusts
There are a variety of different types of trusts. Some are more general and broad, while others are quite specific and address a specific need for the future. Let’s take a closer look at the different types of trusts.
A living trust is one set up by the trustor during their lifetime. They can benefit from this trust while alive and use assets from the trust while alive.
Upon their death, the trust assets then get transferred to the beneficiaries. A living trust allows the estate to avoid having to go to probate court.
A revocable trust, sometimes called a revocable living trust, allows the trustor to make changes to the trust throughout the time they are alive.
They can make changes to beneficiaries and rearrange the assets in the trust at any time. It gives the trustor flexibility to make decisions about the trust while alive.
The directions of the trust don’t kick in until the trustor dies and the trustee then must follow the guidelines established in the trust.
An irrevocable trust is one that once it’s established cannot be changed in any way. You want to be very certain of your intentions if establishing an irrevocable trust.
The reason people will sometimes use them is to create a shelter for assets for tax purposes.
A blind trust is set up so that the beneficiaries have no say in how the trust is managed. The trustee can make decisions without others seeing how trust assets are being managed.
A trustor might decide to establish a blind trust if they expect there to be potential conflicts between beneficiaries.
Credit Shelter Trust
A credit shelter trust, sometimes called a marital trust, is one where the assets of one spouse’s trust are transferred to the other spouse upon their death. This type of trust arrangement is often used to avoid tax implications for the involved assets.
A charitable trust allows a trustor to earmark assets for a charity from the trust. In some cases, the trust builds funds while the trustor is alive to donate the charity. In other cases, the trustor can designate part of the trust funds to beneficiaries and the remainder to a charitable organization.
Often charitable trusts get used to avoid paying taxes on trust funds or to lower the tax burden.
A generation-skipping trust allows you to skip a generation and name the next generation as the beneficiary. Because of this, the estate can avoid estate taxes.
You might have it set up that grandchildren get assets from the trust instead of children. Yet, your children can still get income that those same assets might produce.
A Qualified Terminable Interest Property Trust (QTIP Trust) allows you to disperse assets from your trust at different times. If the trustor dies, they might designate that their spouse gets income from the trust. When the spouse dies, then perhaps children get income from the trust.
Life Insurance Trust
A life insurance trust takes the proceeds from a life insurance policy. The trustee of the trust then invests those funds under the trust umbrella, protecting them from estate taxes.
Special Needs Trust
If you have a dependent with special needs, especially one who receives government aid because of their disability, you might consider a special needs trust.
The special needs trust makes the beneficiary the person with special needs. It allows for funds from the trust to be used for medical care or day-to-day needs while retaining the dependent’s entitlement to government benefits.
If you have saved all your life, you don’t want your assets to go to someone who might squander them away frivolously. A spendthrift trust allows you to designate when your beneficiaries can get assets and even how they can be spent.
A testamentary trust is set up through a last will and testament. It allows for funds from the trust to be transferred by the executor of your will to an account for the trustee to manage and distribute according to the direction of the trustor.
Sometimes called the payable-on-death account, the Totten trust allows you to deposit funds into a bank account. Upon death, the designated beneficiary can get the funds from the account. This is considered a revocable trust. The beneficiary would not have access to the funds while the trustor is alive though.
Estate Planning to Fit Your Needs
With so many different types of trusts, it makes sense to do your research and consider which options will work best for your individual needs.
It also makes sense to consult with a professional who understands the intricacies of each type of trust. If you want advice on making your estate plans, we can help. Contact us today to set up a time for us to talk about your estate needs.