Different Trust Types in Estate Planning
In estate planning, trusts can be used for the easy distribution of assets to heirs. Structured right, trusts can help you avoid taxation and a drawn-out probate process. They are a great way to ensure assets are immediately passed from the original owner to the heirs, and are managed according to the owner’s wishes.
You may want to establish a trust for several reasons. Thus, there are different trust types, each satisfying a unique goal or financial situation. Knowledge of how the different types of trusts work can decide which type is best for your estate plan.
What Is A Trust?
A trust is a legal arrangement where a person (trustor) transfers ownership of assets to another (trustee), who manages it on behalf of the beneficiary. Once the trustor establishes the trust, it is the responsibility of the trustee to manage those assets according to the trustor’s wishes. In many cases, the trustor may also be the trustee, or one of the trustees – until their death.
Types of Trusts in Estate Planning
Revocable Trusts
Also known as revocable living trusts, they allow trustors to maintain control of their assets during their lifetime. A revocable trust can be changed or dissolved if necessary. For instance, if you acquire new assets or get divorced after establishing the trust, the terms of the trust may require new updates to reflect the current situation.
Revocable trusts are flexible since the transfer of assets and the wishes specified therein do not become permanent until your death. They also allow you the option of naming yourself the trustee or co-trustee; you can designate a successor trustee to manage your assets when you are unable to manage the assets or pass away.
Revocable trusts are also a great choice as they help you avoid probate. Your assets will not have to go through the probate court if they are transferred during the trustor’s lifetime so they can be owned by the trustee at the time of the trustor’s death.
Irrevocable Trust
This is a trust type that cannot be modified, altered, or revoked in any way once it is established. Once assets are transferred to an irrevocable trust, you cannot undo the action – not even the trustor.
One major benefit of an irrevocable trust is that it acts as a safeguard. This type of trust can protect the trustor’s assets from claims from beneficiaries, creditors, or Medicaid. It can protect certain assets from gift and estate tax. This may be a great choice for individuals who have large estates and need a way to cut off some tax liability on the properties.
Special Needs Trust
A special needs trust is one that is set up to take care of the financial demands of a special needs dependent without causing them to be disqualified from receiving government benefits. The dependent here may be a child, sibling, or parent, and the money in the trust is designed to cater to their medical care or daily needs while ensuring they remain eligible for government benefits.
Charitable Trust
A charitable trust is one that is designed for the benefit of a charity or the general public. They are typically part of an estate plan in order to avoid the liabilities that come with a gift and estate tax.
Charitable trusts are of two types: charitable remainder trust and a charitable lead trust. A charitable remainder trust is one that generates a potential income stream for you from your assets for a particular period of time, with the remaining assets going to a designated charity. A charitable lead trust is one that allows you to set aside certain properties for a particular charity or charities, with the remaining assets going to your beneficiaries after your death. The charitable lead trust also helps to minimize the potential tax liability the beneficiary will have to pay upon inheritance.
Spendthrift Trust
If you’re worried about your beneficiaries spending their inheritance without control, a spendthrift trust is the best choice. This trust type allows you to determine how your assets can be accessed, preventing them from being mismanaged. For instance, you may restrict your heirs to accessing only the income or interests from your trust assets, but not the principal trust amount.
Life Insurance Trust
This is an irrevocable trust that you can set up in order to secure the proceeds of life insurance. The trust can represent the beneficiary of your life insurance policy; so, the proceeds from the policy would be paid into the trust when you pass away. The trustee will be charged with managing the proceeds on behalf of your beneficiaries.
One key benefit of an irrevocable life insurance trust is that it allows you to cut off estate taxes on payouts from life insurance policies.
Totten Trust
Also known as a payable-on-death account, this type of trust allows you to deposit money into a bank account or other security in the name of the beneficiary. When the trustor dies, the money is now transferred to the named beneficiary of the bank account.
About the Author: Roxane Kaye, has been practicing law since 2002. She is admitted to practice law in Michigan state courts and before the Federal Bankruptcy Court of Eastern Michigan, Southern Division, as well as the Federal District Court of the Eastern District of Michigan. Roxane covers cities such as Burton, MI, Flint, MI, Fenton, MI, Beecher, MI, Lapeer, MI, Waterford, MI, Auburn Hills, MI, Pontiac, MI, Howell, MI, Owosso, MI, Wixom, MI, Rochester, MI, Rochester Hills, MI, Novi, MI, and South Lyon, MI.
You may contact Roxane below:
Roxane M. Kaye
Kaye Law Office, PLLC
8161 S Saginaw St
Grand Blanc, MI 48439
