Introduction
A trust is something you can create while you’re alive to plan for your death. It can also be formed after death or created with your will. As soon as you put any assets into your trust, they do not belong to the trustee you’ve assigned, but the trust itself. This means the assets stay subject to the trust contract’s instructions and rules.
A trust is basically a property right held by one party to benefit another. The title for the trust property is held by the trustee, while the person receiving trust benefits is called the beneficiary. There are quite a few different trust types, but the most common ones are irrevocable and revocable. Let’s go over each of those first and then look into some of the other types.
Irrevocable Trusts
An irrevocable trust may not be revoked, modified, changed, or altered once it’s been created. As soon as a property has been transferred to this type of trust, no one can remove the property from the trust, including the trust creator.
“While traditional irrevocable trusts usually only had one or perhaps a small group of trustees that managed all of the administrative details of the trust and its corpus, today’s irrevocable trusts will often divide those tasks among a much larger group of people,” said Mark P. Cussen, financial planner and author. “This allows for a more efficient division of labor and a higher level of management expertise.”
Revocable Trusts
These type of trusts are made by the trust maker while they are alive and may be revoked entirely, modified, changed, or altered. Also known as living trusts, these involve transferring a property title to a trust. Serving as the trustee initially, the trust maker has the ability to change this or remove that property from the trust conditions while they are alive.
A revocable trust is very useful for avoiding probate. If asset ownership is transferred to this type of trust when the trust maker is still alive and belongs to the trust when the trust maker passes on, the assets are safe from probate.
“The main reason for this type of trust is to bypass the probate process upon your death. Assets will pass directly to all of the beneficiaries listed in the trust,” said Dan Crimmins, a financial advisor in New Jersey. “Other reasons are to appoint someone to manage your affairs if you are still living but mentally incapacitated, or for privacy reasons – unlike probate, which is a court procedure with a public record, the details of your assets and beneficiaries are spared from public scrutiny.”
Revocable trusts shouldn’t be considered a technique for protecting assets, however, as any assets added to the trust when the trust maker was still alive will be available to creditors of the trust maker. But a revocable trust will make it a bit harder for creditors to access them since they would have to petition a court order to do so. Usually, a revocable trust will evolve into irrevocable when the trust maker passes on.
Charitable Trust
These types of trusts benefit the public or a specific charity. They are typically established in an estate plan to avoid or lower gift and estate tax. You might find a CRT (Charitable Remainder Trust) a useful tool for financial planning as this can give you valuable benefits. Along with the financial advantages, there’s also the honor that some charities give to donors who name their organization as a CRT beneficiary.
Spendthrift Trust
This type of trust is made for a beneficiary and doesn’t allow them to pledge away or sell interests related to that trust. It’s protected from creditors of the beneficiary until the property in the trust is distributed to the beneficiary.
Another benefit to a spendthrift trust is that it protects your beneficiaries from being irresponsible with their newly acquired capital. You can name a trust with a protective clause, such as a “spendthrift provision.” An arrangement like this can mean your beneficiaries are provided with enough funds to support them without having access to the principal.
Asset Protection Trust
This trust type is meant to protect assets from future creditors’ claims. Oftentimes, an asset protection trust will be set up outside of the U.S., although that isn’t always necessary. An Asset Protection trust is meant to protect assets from attacks by creditors. They are normally built to be irrevocable for some years without the trust maker as a current beneficiary.
This type of trust will normally be structured to give the trust maker control over their assets after the trust is terminated and there isn’t any risk of attack from creditors.
Constructive Trust
Also considered an implied trust, a Constructive Trust is court-established and determined based on certain circumstances and facts. The court could decide that the property owner had an intention for the property to go to a particular person or be used for a certain purpose, even if there wasn’t a formal trust declaration.
Special Needs Trust
Many times, when someone is getting government benefits, a receipt of a gift or inheritance can eliminate or reduce their eligibility for those benefits. A Special Needs Trust is set up for someone who receives benefits from the government and can protect them from getting disqualified from continuing to get them. This is allowed under the rules for Social Security as long as the disabled beneficiary doesn’t control the frequency or amount of trust distributions and isn’t able to revoke the trust.
Creating a trust is a good way to secure a future for your loved ones and protect your assets. Although there are many planning benefits to using a trust, they are quite complicated and require advice from a professional. Getting the right guidance will offer a protective and seamless transition to your family’s future.
Call our Estate team at (480)467-4325 to discuss your case today.