What Is a Trust?
Estate planning law allows for the creation of not just wills, but trusts as well. A trust is a legal document that provides instructions as to how the property titled in the trust’s name is to be managed. These written instructions can provide important legal benefits. Trusts have been used since the Middle Ages and pre-date wills. They can also take various forms.
Why Do I Need a Trust?
There are so many advantages to trusts that recent studies report that up to half of all people who now plan their estates are using trusts instead of wills.
Many people find trusts preferable to wills because with a trust, you can often avoid the lengthy and complex probate process. Plus, with wills, attorneys are only able to do so much to protect your assets. Trusts provide many more options for safeguarding yourself, your property, and your family.
What Types of Trusts Are Available?
There are two main types of trusts—Testamentary Trusts and Living Trusts.
When a person drafts a will, the individual doesn’t always want the inheritance to go directly to the spouse or child. Sometimes, they would prefer that the assets be managed for the beneficiary’s protection over an extended period of time. In this case, a trust attorney can create a Testamentary Trust to manage the inheritance for the beneficiary. Testamentary trusts are created within wills, and like wills, they are court-supervised as part of the required probate court proceedings.
Unlike Testamentary Trusts, Living Trusts go into effect immediately upon signing. Therefore, they offer lifetime planning opportunities such as instructions for managing your assets should you become disabled, for instance. A properly designed Living Trust can provide:
- Incapacity planning
- Legitimate tax avoidance
- Asset protection for the surviving spouse
- Individualized planning to protect your spouse and children
- Enhanced privacy
There are several different types of living trusts.
With a Revocable Living Trust, the instructions regarding the management of assets and properties can be altered at any time, so long as the Trustmaker is still legally competent. In addition, property can be removed or added to the trust per the Trustmaker’s wishes. These types of trusts are popular because they provide the Trustmaker with the maximum amount of flexibility.
An Irrevocable Life Insurance Trust is established for the benefit of someone other than the Trustmaker, usually the Trustmaker’s spouse or children. Unlike Revocable Living Trusts, Irrevocable Life Insurance Trusts cannot be revoked or amended once they have been established. This type of trust can be extremely beneficial, however, in that it removes life insurance death proceeds from your estate and thereby reduces the value of your estate for estate tax purposes (meaning you will pay fewer taxes). It also allows you to direct how the proceeds of your life insurance will be passed on to your beneficiaries.
A Qualified Personal Residence Trust is an irrevocable trust that allows the Trustmaker to reserve the right to continue living in his or her home even after it is transferred to the trust. Under this type of trust, you are entitled to use your home for a predetermined amount of time after which ownership of the residence will be transferred to your children. This will remove the property from your taxable estate and entitle the asset to a valuation discount while simultaneously reserving your right to inhabit the house.
A dynasty trust is a special type of trust designed for those who wish to pass their assets on to their grandchildren or other descendants without being heavily taxed. By leveraging the Generation Skipping Tax (GST) exemption, Dynasty Trusts allow individuals and couples to secure a certain amount of money in trust for the benefit of succeeding generations. The wealth in this trust will then pass from generation to generation and provide necessary funds for the beneficiaries’ health, support, and education. This protects and allows the beneficiary to maintain a certain lifestyle while avoiding taxes associated with a larger estate.
A Minor’s Demand Trust is another option for parents or grandparents who wish to leave lifetime gifts for their descendants. This type of trust provides special tax exemption by allowing for annual monetary gifts that do not exceed the amount required to be eligible for the gift tax exemption. Minor’s Demand Trusts are flexible because the gifted funds are not limited to the beneficiary’s educational needs; instead, the Trustee can use the funds for any reason so long as it benefits the child.
A Common Trust is a good estate planning option for couples with more than one child. In a Common Trust, funds are preserved for children and disseminated on an “as-needed” basis. There are many different variations of Common Trusts, but the cornerstone of every Common Trust is to provide for all your children’s needs just as you would if you were still alive. Any number of detailed instructions can be provided to the Trustee within the Common Trust to address special considerations regarding the needs of each individual child.
Estate planning laws recognize that in some families, a child may never be able to provide for himself due to a physical or mental disability. In these cases, a Special Needs Trust can be beneficial. A Special Needs Trust designates a Trustee who is responsible for providing for the financial and medical needs of the child per the written instructions left by the deceased parent. In a Special Needs Trust, you may also appoint a guardian who will see that the child’s emotional, religious, and social needs are met.
A Tax-Sheltered Family Trust, sometimes referred to as a Credit Shelter Trust or Bypass Trust, is helpful for couples who wish to legally avoid or reduce estate taxes. In a Tax-Sheltered Family Trust, property is transferred to the trust at the time of the first spouse’s death, rather than directly to the surviving spouse where it would be taxable in that spouse’s estate.
A Charitable Remainder Trust (CRT) is a special type of irrevocable trust in which the assets donated are shared between the Trustmaker and the charitable beneficiaries. Typically, a CRT pays income to the Trustmaker for an extended period of time, or even for his or her entire life. Any remaining principal is then paid to the designated charities. CRTs allow individuals to benefit from the sale of property that that they may otherwise be penalized for in the form of capital gains taxes. Since the assets in a CRT are removed from your estate, you can also benefit from estate tax savings.
In a Charitable Lead Trust (CLT), the recipients of income and assets are reversed. With a CLT, the designated charities receive the trust’s income, and the Trustmaker (or his or her beneficiaries) receive any remaining assets once the trust has been terminated. As with other types of Charitable Trusts, CLTs can also result in significant tax benefits.
The Stand-Alone Retirement Trust is designed for those who want to have control over their wishes for tax-deferred accounts. This is a separate trust intended to protect assets that are passed on to one or more beneficiaries by enforcing exactly how and when the assets will be distributed. All distributions are paid into the trust, and then the trust can pay out directly to the beneficiary, accumulate assets in the trust for a certain period of time or pay out according to specific instructions, such as money earmarked for the beneficiary’s college education.
This irrevocable trust is designed to help the grantor distribute family wealth while avoiding the gift tax. The gifting trust makes use of a special type of trust, such as a Crummey trust, to allow the grantor to give assets in excess of the annual gift tax exclusion. The trust offers withdrawal rights to the beneficiary for a limited time, which puts the gift in the “present interest” category, rather than the “future interest” category – and thus, is it not subject to gift taxes.
An offshore trust is a trust created outside of the legal jurisdiction of the United States. These offshore trusts are effective in protecting assets simply because the laws of the nations in which they are drafted provide better creditor protection that the protections provided in the U.S. Offshore Trusts do not require that the assets themselves be moved from U.S. soil, nor do they require that the Trustmaker relocate. As long as the ownership of the assets and the jurisdiction governing the trust reside in a trust-favorable nation, the Trustmaker receives full asset protection. These types of trusts can come with significant maintenance fees, but the peace of mind that comes with this planning option is often well worth the investment. An experienced trust lawyer with a firm grasp of estate planning laws can help you decide whether this means of asset protection is right for you.