Many people have preconceived notions about trusts and believe that they are only for multi-millionaires who wish to leave large trust funds to their children. This is far from the truth; trusts can be invaluable tools in the estate plans of a wide range of individuals.
Trusts are simply an arrangement in which one party holds property on behalf of another party. In the estate planning context, trusts are created by the person doing the estate planning (the settlor), who authorizes another person (the trustee) to manage the assets for the benefit of a third party (the beneficiaries). There are many reasons for establishing trusts, including tax minimization or providing for the needs of underage beneficiaries.
Some types of trusts that may be useful in estate planning are:
- Trusts for minors. Many people leave money to their children or their grandchildren in a trust as part of a comprehensive estate plan. This is typically done to ensure the money is there for the children’s benefit while they are younger—for support, education, medical expenses, etc. Once the children reach a certain age or achievement level (obtaining a bachelor’s degree, for example), they may receive money from the trust to do with as they please.
- Special needs trusts. Special needs trusts are tools that enable a person to leave property to an individual with special needs. Many individuals with special needs receive government benefits. If they were to suddenly inherit money, in most cases they would be disqualified from those benefits until the inheritance was spent. Special needs trusts protect the government benefits for those individuals while allowing them access to funds they may need.
- Marital trusts. Married couples typically include trusts in their wills, or for the benefit of their spouse, for two reasons: (1) taxes, and (2) property protection. In previous years, marital trusts were needed for some couples to take advantage of estate tax exemptions, and they may be needed in the future as new laws take effect. Marital trusts can also protect property from a spouse to ensure that it ultimately goes where it needs to go. For example, a husband with grown children from a previous marriage may decide to let his wife use his property after he passes, but puts it into a trust so that after she passes away it goes to his children.
- Revocable living trusts. Revocable living trusts are documents completely separate from wills, although they often work hand in hand to carry out the decedent’s wishes. Revocable living trusts are primarily used to avoid probate, but in a few other instances as well, such as when a person owns real estate in multiple states.
- Irrevocable life insurance trusts. Irrevocable life insurance trusts (or ILIT’s) can be used in order to move a person’s life insurance proceeds outside his or her estate for estate tax purposes.
- Spendthrift trusts. Spendthrift trusts are generally established to protect the beneficiaries’ assets from both themselves and creditors. These trusts usually have an independent trustee that has complete discretion over the distribution of assets of the trust.
As you can see, there are many different types of trusts, each of which can be customized to serve a valuable purpose in accomplishing the wishes of those making gifts or planning an estate. An experienced estate planning attorney can help you assess your finances and goals, ultimately to determine the best vehicles to preserve your wealth and your legacy.