Trusts: A Quick Overview
WHAT IS A TRUST?
A trust, in simplest terms, is a legal arrangement where the ability to control something and the ability to enjoy that something belong to different people. When money is put into a trust, it is managed by a person called a trustee. That person has a fiduciary responsibility to take care of the money in a way that protects it from harm. The person who gets to enjoy the money is the beneficiary of the trust. What the beneficiary actually receives is decided based on the terms of the document creating the trust.
WHY WOULD I USE A TRUST?
There are a lot of different kinds of trusts and each accomplishes a different goal.
TYPES OF TRUSTS
Revocable trusts, also known as living trusts, are often set up so that the person creating them can properly manage their assets during their lifetime and after their death. Since the trust is revocable, the creator can change it as their needs dictate while they are alive. Once they die, the property in the trust is managed by the trustee based on the terms laid out in the trust document. These types of trust are often used in estate planning to avoid probate court.
Testamentary trusts are created within a dying person’s will. These trusts still go through probate, but they allow for additional asset control that the probate process is often ill-equipped to handle. These types of trusts are commonly used for parents of minor children who want to make sure that the assets they have are managed while their children mature into adults.
Irrevocable trusts are similar to revocable trusts in many ways, but with one caveat - an irrevocable trust cannot be undone by the individual that created it. Irrevocable trusts are often used to make gifts in a way that provide protection from creditors and taxes on the estate. Irrevocable trusts are an important planning tool in high-value estates.
SPECIAL NEEDS TRUSTS
Special needs trusts are used to help family members with disabilities qualify and remain eligible for government assistance without limiting the availability of financial assets to make sure the beneficiary retains good qualify of life. These trusts are typically set up in a way that prevents money used for the beneficiary’s benefit from jeopardizing Medicard, Social Security, and other benefits.
Charitable trusts let you give money to charity while still keeping the property you donate. These trusts are usually set up so that you receive income from the trust for either a set period of time or the rest of your life, with the charity receiving everything left in the trust when you die. These trusts are used for income tax benefits since you can claim the amount donated as a charitable contribution while retaining income from the trust.
There are a bunch of other, more technical types of trusts that estate planning attorneys often use to achieve specific goals for their clients. These trusts are very technical and serve limited purposes. They are not overly common, but they definitely have uses. Some of these trusts include:
- QTIP trusts
- QPRT trusts
- Credit shelter trusts
If you wondering whether a trust makes sense for your financial situation, give the firm a call. We would be happy to go over your options.