A trust is a legal document, giving people the right to an asset but not ownership of the asset. The trust will outline rules for how the money can be used and even have instructions for how requests to the trust must be considered and how the asset must be managed by the person or bank holding the trust.
Someone can create trust after death by leaving instructions in their will, or they can create trust while they are still living. There are many reasons to create a trust and different types of trusts to accommodate those reasons.
Two Basic Types of Trusts
There are a lot of different types of trusts, but the broadest categorization for trusts is irrevocable and revocable. We will look at what this means before we look at the other types of trusts.
Revocable Trusts
A revocable trust is sometimes also called a living trust because they are created while the trustmaker is still alive. Because the trustmaker is still alive, they have ultimate control over the trust and can alter the trust rules, add and remove assets, and even completely revoke the trust as they see fit.
Many people will create a revocable trust to avoid probate taxes. The assets in the trust belong to the trust, not the trustmaker, therefore the trust is not seen as part of the trustmaker’s estate. A revocable trust does not completely protect the asset from creditors as a creditor can petition the court to access funds or assets in the court to settle debts.
If the trustmaker dies, then the revocable trust will become irrevocable as the trustmaker is not alive to revoke it or change the terms of the trust.
Irrevocable Trust
An irrevocable trust cannot be modified or changed in any way once it has been set up. The trustees and trustmaker are unable to remove the asset from the trust once it has been set up.
Types of Trusts
There are a few types of trusts that are designed for specific purposes and have legal or tax protections to fulfil these needs. We will discuss some of these types of trusts below but speak to your attorney to help find the best type of trust for your needs.
Asset Protection Trust
The purpose of this type of trust is to protect your assets from creditor claims. They often need to be irrevocable for a certain period of time and not have the trustmaker as a beneficiary to be safe from creditor claims. In some cases, they may even be set up in foreign countries, depending on the type of creditor you are protecting the assets from.
Once the trust period is over, most asset protection trusts are designed to return the asset to the trustmaker.
Charitable Trust
A charitable trust has a charity as the beneficiary. These are not only the best way to support a charity over a long-term basis but also will reduce estate tax. It can be set up either after the trustmaker’s death or during their lifetime. A charitable trust can have large financial benefits like tax benefits.
Constructive Trust
If someone dies without making trust and a beneficiary believes that they would have been left a trust, then the court may set up a trust if it finds enough evidence to support an implied trust. Both parties will need to present evidence to show that the deceased wanted them to benefit from the asset.
Special Needs Trust
A special needs trust allows somebody to provide financial assistance to someone receiving government benefits. If the person were to give the benefits recipient a lump sum payment, they would become ineligible for their benefits. By creating a special needs trust, the trustmaker can legally provide additional financial assistance without disrupting Social Security payments or other government benefits. The beneficiary must not be able to control the distributions or revoke the trust.
The trustmaker can provide funds to allow for additional services, care, or luxuries that the beneficiary would not usually be able to access with their finances or benefits. A special needs trust can include a rule that will terminate the trust if it would make the beneficiary no longer eligible for government benefits.
There are some restrictions surrounding what the funds from a trust can be used towards by the beneficiary. Some examples are:
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- Education
- Rehabilitation
- Transportation or purchase of vehicles or transportation services
- Vacations
- Money for gifts
- Companion payments
- Glasses
- Medical treatment
- Dental treatment
- Insurance
- Equipment
- Dietary needs
- Athletic contests
- Trips
- Movies
- Maintenance
We have only provided a shortlist of examples; speak to your attorney for a full list of the things a special needs trust can be used to fund.
Parents and people responsible for a disabled person should consider creating a special needs trust in their estate plan. It will help provide the funds to help care for their child while ensuring their child will continue to receive government benefits. A disabled person can also create a special needs trust for themselves if they will receive a large lump sum and want to protect their eligibility for benefits.
Spendthrift Trust
A spendthrift trust is a great way to financially provide for someone who is financially irresponsible. The assets in the trust are protected from the creditors of the beneficiaries and can only be accessed by creditors once the beneficiary receives payment. The trust will have strict rules surrounding how beneficiaries can apply for payments or will distribute money on a set schedule.
Tax By Pass Trust
Usually, someone can leave their spouse money upon their death without the money being subject to federal estate tax (because of marital assets). However, when the second spouse dies, that money will be taxed if the second spouse’s total assets are above a certain amount. A tax by pass trust will limit the federal estate tax, thereby reducing the tax burden on the children. The trust basically holds the assets, and the children will automatically become beneficiaries after the death of the second spouse. It also prevents the second spouse from redirecting the inheritance to any future spouses or other beneficiaries.
Totten Trust
This type of trust allows a trustmaker to make small installments into a financial account with another person or entity named as the beneficiary. The Totten Trust will not be subject to probate when the trustmaker dies.
A Totten Trust can only hold securities and financial accounts, not real property. It allows you to pass assets onto family members without allowing them joint ownership while you are alive.
The account title needs to contain one of the following words:
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- In Trust For or ITF
- Payable on Death To or POD
- As Trustee For or ATF
The beneficiary must be identified after the words.