Types Of Trusts In Estate Planning

Yee Law Group Inc. > Types Of Trusts In Estate Planning

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. 

Revocable Trust
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. 

Irrevocable Trust
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. 

AB Trust
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. 

QTIP Trust
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. 

Spendthrift Trust
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. 

Charitable Trust
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.