Estate Planning Attorney
67% of all Americans have no estate planning in place. While living through a global pandemic has certainly increased awareness of the importance of estate planning, many still don’t have any formal estate plans.
Some people just don’t make the time to do this type of planning. Some may feel they don’t have enough assets to bother with it. Many find the idea of facing their mortality a challenge.
Yet, most people agree that having a plan and sparing your loved ones hassles when you’re gone should be a priority. With many types of trusts available, estate planning doesn’t need to be only for the super-rich or elderly.
There’s likely a host of reasons why most people don’t have an estate plan; the first step in being proactive and getting your estate plan in place is understanding the different types of trusts.
A knoweledgeable estate planning attorney from the De Bruin Law Firm explains below different types of trusts available to people who are planning their estates. Read on to learn more about estate planning and the types of trusts that might work for you.
What a Trust Is
A trust is a type of legal document that works to organize and hold your legal documents, property, and assets. A trust is a relationship between the trustor, the person creating the trust, and the trustee, the person caring for the trust on behalf of the trust’s beneficiary.
Many people assume a trust and a will are the same. When you consider trust vs. will, they are quite different. A will names where you wish your assets to go upon your death.
A trust holds your assets upon your death. It works as an organization plan, so when you die, your assets are protected, and there’s a person ready to handle them on your behalf.
Benefits of a Trust
There are a host of reasons why someone might choose to create a trust as part of their estate planning. These might include:
- Avoid probate and pass assets to heirs through the trust
- An organized plan for managing your assets before and after your death • Designate assets for minors or special needs dependents
- Designate funds for the care of minor children and their future • Reduce estate taxes
For many, the biggest goal of a trust is to plan for the future and to establish a plan to ensure their loved ones will be protected in the future.
Categories of Trusts
While there are many different types of trusts, they generally fall under one of several categories.
A living trust or an inter vivos trust is active during the lifetime of the person who creates the trust. This person is often referred to as the grantor.
A grantor can also set up a testamentary trust. In this type of trust, the trust doesn’t actually exist until the grantor dies. Its formation goes into effect when the grantor dies.
A grantor can create various types of trusts as revocable trusts. This means they remain in control of the trust and can make changes or revoke information in the trust while they remain alive.
An irrevocable trust is one that the grantor or their trustee cannot change once the trust is legally put into place.
You might choose one of these options over the other for several reasons. It’s smart to work with an estate planning lawyer who can guide you through the options that will work best for your needs and wishes.
Types of Trusts
Again, you could create many different types of trusts depending on your needs. Let’s take a closer look at some of the trust options you might opt to use.
A revocable trust, often called a living trust, is one of the most common options for a trust in estate planning.
The grantor creates the revocable trust, who often acts as the trust’s initial trustee. The benefit of the revocable trust is that the grantor can make changes to the trust at any time.
While the grantor can remain in control of the trust while alive, the trustee can step in if they are unable to care for the trust.
This type of trust helps avoid probate and allows for assets to be distributed right away following the grantor’s death if that abides by their wishes.
Unlike a revocable one, an irrevocable trust can’t be changed or adjusted once created. An irrevocable trust can go into effect while the grantor is alive or upon their death.
If the irrevocable trust is put into place, it can’t be controlled or managed by the grantor. Instead, a trustee is designated to handle the responsibilities of the trust.
Marital A Trust
Marital A trusts are often used by married couples. When one spouse dies, the assets, property, and potential income from the trust are then passed onto the other spouse.
This type of trust is often desirable between a married couple because it allows the surviving spouse to generally avoid paying taxes on assets inside the trust.
When the surviving spouse dies, the assets would be taxable to whoever inherits at that point.
Bypass B Trust
Another option for many married couples is the Bypass B trust, sometimes called a credit shelter trust. Like the Marital A trust, when one spouse dies, the other spouse inherits the assets in the trust.
The difference is that the surviving spouse doesn’t control the assets directly. This is an irrevocable trust, and a trustee manages the assets in the trust on behalf of the surviving spouse.
Many like this option because it helps to avoid hefty tax burdens for those heirs that inherit down the road since the assets remain under the control of the trust.
Irrevocable Life Insurance Trust
An irrevocable life insurance trust is an irrevocable trust involving a life insurance benefit. A grantor might create an irrevocable trust and name the trust as the beneficiary of a life insurance policy.
This type of arrangement is sometimes used so the trustee can use funds from a life insurance benefit to pay estate taxes following the grantor’s death. This plan often works well when there’s a family business and the grantor wants to protect the company and its assets from taxes.
An AB trust is one type of separate marital trust. In this type of trust, when one spouse dies, the trust basically divides.
Half of the trust goes to the surviving spouse. They can use the assets as they see fit. The other half of the trust, or the B trust, is set aside for other heirs.
A QTIP trust or a Qualified Terminable Interest Property trust is a type of trust that’s commonly used when spouses have children from previous marriages or relationships.
Like an AB trust, the surviving spouse inherits part of the trust, or the A part of the trust. But in this type, the spouse can only access interest from the B part of the trust while they’re still alive. They don’t have access to the principal part of the trust, which is set aside for other heirs.
Special Needs Trust
If you’re a person who’s responsible for caring for a special needs person like a child, parent, or sibling, this type of trust is useful.
It allows you to set aside funds to help care for the special needs person. They can use the money for medical needs or day-to-day care, yet it won’t impact their ability to continue to get government aid for their disability.
The funds are inside the trust, so they don’t impact eligibility for government aid or support.
Generation Skipping Trust
Some people, when planning their estate opt to pass their assets onto grandchildren, skipping over their children as heirs.
This is a strategic tax move since it allows the children to avoid paying any taxes on the assets in the estate. The children don’t inherit assets from the estate, yet they can use income generated from assets inside the estate.
You don’t spend your life saving and planning for the future only to have an heir blow it all unwisely. If you have an heir that you’re worried won’t use an inheritance wisely, you can opt for a spendthrift trust.
This type of trust allows you to designate when and how the assets in the trust are distributed, so you can help to control the untethered use of the assets.
You may have specific charities that you’ve opted to support throughout your life. You may wish to have some of your assets go to these same charitable organizations upon death.
There are two types of charitable trusts: a charitable lead trust and a charitable remainder trust.
A charitable lead trust has you designate a particular portion of your assets to a charity; the remaining amount goes to your heirs.
A charitable remainder trust allows you or your heirs to receive income from assets in the trust for a certain period. Then when that period expires, the charitable organization gets the remaining amount from the trust.
Trusts for Every Kind of Estate Plan
There are many types of trusts for estate planning, so you can be assured your assets are handled the way you wish. It’s also smart to use estate planning to help heirs avoid an unnecessary tax burden.
As you consider estate planning tips, it’s also wise to work with an experienced estate planning attorney. Laws change frequently, and you want to protect your assets in the best way possible.
If you’re ready to start estate planning, an estate planning attorney can help. Contact an estate plannning attorney today so that they can get to work on the best estate plan for your needs.