Estate Planning Trusts
7 Types Of Trusts Explained
Having an Estate Plan makes sure your money and property are managed during your life and after you pass away. A lot of people typically think of a Last Will and Testament when thinking about Estate Planning.
However, there are many different types of tools, and some may even avoid probate. Many people use an Estate Planning Trust to transfer their assets to their families. There are many types of Trusts, each of which has a different purpose. This article will discuss some of the more popular options.
What Is An Estate Planning Trust?
An Estate Planning Trust is an arrangement between the Grantor and Trustee. The Grantor is the person who creates the Trust and transfers their assets into it. The Trustee is the person who manages the Trust according to the Grantor’s wishes. Typically, the Grantor is the acting Trustee until their death.
Like a Will, a Trust can have beneficiaries. Beneficiaries are typically your family, but it may also be a charitable organization. The beneficiaries are entitled to the Trust’s assets and are distributed according to the Grantor’s wishes.
For a Trust to work, it must be funded. Funding happens when you transfer assets into the name of your Trust.
Advantages of Estate Planning Trusts
An Estate Planning Trust has many advantages, and you may want to consider creating one if any of the following apply to you:
- If you would like your assets passed to family members and loved ones without going through probate court
- If you would like to create a plan for managing your assets in case you ever become incapacitated
- If you have family members with special needs and would like to set money aside for them
- If you would like to set inheritance requirements for beneficiaries. For example, the beneficiary must reach the age of 25 before receiving their inheritance
- Maintain assets to care for minor children when you pass away
- Reduce estate taxes
Overall, a Trust allows you to prepare for your life and your loved one’s future.
Revocable vs. Irrevocable Estate Planning Trusts
Estate Planning Trusts can be split into two categories, revocable and irrevocable.
A Revocable Trust allows the Trustee to maintain control over their assets over their lifetime and can be amended or revoked at any time. For example, if you go through a significant life change, like divorce, and you need to change your Trust, you can do so.
A Revocable Trust can change as your life changes because you can add or remove assets throughout your lifetime. This does not become permanent until you pass away. With a Revocable Trust, you can name yourself as Trustee to manage the Trust while you are living, and name a Successor Trustee to continue managing the Trust if you ever become incapacitated or pass away.
If the Revocable Trusts is funded correctly, it does not pass through probate court. This means that the Trust’s assets do not need to go through the long exhausting court process. In addition, probate is a public process, so the Trust allows for greater privacy for you and your family. It is also more difficult for creditors to make a claim against the estate.
Unlike a Revocable Trust, you cannot amend or terminate an Irrevocable Estate Planning Trust. If you place anything into the Trust, you cannot take it back out.
The main benefit of an Irrevocable Trust is that it can be used as protection against creditor claims, Medicaid, and more.
An Irrevocable Trust is also beneficial if you have a large estate and need to remove certain assets from your estate to avoid estate taxes.
Special Types of Estate Planning Trusts
Beyond Revocable and Irrevocable Trusts, there are various other types of Estate Planning Trusts that you may wish to use. The type of Trust you may need depends on your situation and what you are looking for the Trust to do.
A Marital Trust is typically created by one spouse and benefits the other if one spouse passes away. After the first spouse dies, any assets in the Trust are passed to the surviving spouse. Using the Trust to give the assets avoids paying estate taxes for the surviving spouse’s lifetime. However, when the surviving spouse passes, the heirs will have to pay estate taxes.
Charitable Estate Planning Trusts
There are two types of Charitable Estate Planning Trusts. There is a Charitable Lead Trust and a Charitable Remainder Trust. With a Charitable Lead Trust, you may leave specific assets to charities and have the remainder of your assets go to your beneficiaries. A Charitable Remainder Trust lets you receive income from your assets for a specific period of time and then allows any remaining assets to go to a charity of your choosing.
If you prefer to leave your assets to your grandchildren rather than your children, you may want to consider a Generation-Skipping Trust. This option allows you to pass assets to your grandchildren, avoiding your children’s need to pay estate taxes. Your children may still access any income that the assets generate if you allow them to.
Life Insurance Trusts
A Life Insurance Trust is an Irrevocable Estate Planning Trust that allows your family to avoid paying estate taxes on your life insurance payout. This works by designating the Trust as a beneficiary of the policy. This way, the policy is paid directly to your Trust. The Trustee manages and holds your life insurance proceeds for your beneficiaries after you pass away.
If you’re concerned about your beneficiaries misusing their inheritance, you should consider a Spendthrift Trust. This Estate Planning Trust allows you to set restrictions on when and how the beneficiaries may access Trust assets. For example, you may limit the beneficiaries to benefit only from the interest earned on the Trust’s assets, but not the principal amount of the assets.
Special Needs Trusts
A Special Needs Trust can be beneficial if you have a family member with special needs that you need to care for financially. The Trust can assist financially without compromising your loved one’s government benefits. The money in the Estate Planning Trust is typically used for daily needs, medical care, and more.
Summary of Estate Planning Trusts
Having an Estate Plan makes sure your money and property are managed during your life and after you pass away. Many people use an Estate Planning Trust to transfer their assets to their families. There are many types of Trusts, each of which has a different purpose.
Over the past decade at Rochester Law Center, we’ve helped thousands of clients with their Estate Planning needs. If you’d like to set up a free consultation with one of our experienced Estate Planning Attorneys to discuss setting up an Estate Planning Trust, give us a call today at (248) 613-0007. The consultation is free of charge and there is no obligation to retain our services.