Trusts are an important estate planning tool. A trust can protect your assets and help ensure that they are used as you wish after death. There are many different types of trusts and most are meant for specific purposes. In this article we discuss everything you need to know about all types of trusts and how to choose one.
Trusts 101
A trust is a financial arrangement in which a second party, the trustee, holds legal title to another party’s assets. The person who holds legal title to the assets has “constructive” or “equitable” ownership of them. Beneficiaries are people who receive benefits from a trust.
Trusts typically consist of three parties: the settlor (or grantor), the trustee and beneficiaries. A beneficiary receives income or principal at some point during the life of the trust. This takes place through either distributions from an income source or by selling trust property for cash.
Now that the basics are out of the way, let’s have a look at some of the most common trust types.
Living / inter vivos trust
A living trust is a legal document that allows the creator of the trust to allow a trustee to handle their estate. The trustee can manage and control the assets during the life of the trust creator. However, they cannot access or use those assets for their own benefit. You can revoke or change a living trust at any time. That is as long as there are no specific conditions for termination or modification in the trust’s terms.
Revocable & Irrevocable living trust
A revocable living trust is a trust that you create during your lifetime, but are able to change or revoke at any time. You can make changes to the trust at any time, and then transfer property into it as you desired.
An irrevocable trust refers to any trust where the grantor cannot change or end the trust after its creation. People sometimes use this type of arrangement in estate planning, That’s because it allows for more control over how they can distribute assets after death. They also avoid probate court proceedings – which can be lengthy. However, there are some drawbacks to this type of arrangement. You may lose access to certain assets like real estate and retirement accounts if they’re part of such a trust. And what happens if you become incapacitated upon setting up an irrevocable living trust? It’s then possible that someone else would have control over what happens with those assets while they’re still alive!
Testamentary trust
A testamentary trust is a trust that you create with a will. Specifically, it is an article within your will. As a result, the trust does not become effective until after the death of the testator, or creator of the trust. A testamentary trust is a common end-of-life planning tool.
Special needs trust
A special needs trust (SNT) is a legal arrangement and fiduciary relationship, It lets a physically or mentally disabled person to receive income from certain sources. Public assistance programs would otherwise deny such sources. The same applies to chronically ill people.
Some common examples of benefits provided through an SNT include:
Medicaid
Supplemental Security Income (SSI)
Blind Trust
A blind trust is a trust fund where the beneficiary is unaware of the trustee’s identity. The beneficiary may access the trust funds, but often cannot make any decisions about investments or distributions.
The trustee typically invests the funds as they see fit. Then they distribute proceeds back to the beneficiary upon request or at regular intervals (usually annually).
Charitable remainder trust
A charitable remainder trust is a trust that pays the income to a charity or charities for a set period of time (the term). That could also be for the rest of life of one or more beneficiaries. The income beneficiary is usually an individual but it can also be a charity itself. If this is the case, then once you die and during your lifetime, the assets of your CRT will not be subject to estate taxes. There’s one main advantage of a charitable remainder trust: it allows you to defer capital gains tax on any appreciation while still receiving an income stream during your lifetime.
Credit shelter trust
A credit shelter trust is a type of trust fund. It’s primary function is to protect assets for the surviving spouse. The assets in this type of trust are shielded from creditors. This means that they are only available to the surviving spouse.
Spendthrift trust
A spendthrift trust aims to protect the beneficiary from their own potentially irresponsible behavior. The beneficiary has no access to the trust fund and cannot sell or transfer assets in the trust. Normally, the beneficiary would also not be able to use trust assets to pay their debts.
The purpose of this type of trust is to prevent people from squandering their wealth on unwise investments or gambling. This can be especially important when leaving money to an adult who hasn’t adequate judgment skills yet – or ever!
Keep in mind that a spendthrift trust is designed with such strict rules on how its beneficiaries are able to manage their money. As a result they may not qualify for certain types of benefits such as Medicaid. This is so since these programs require recipients’ assets fall below certain thresholds before they can qualify for assistance. However, there are exceptions depending on each state’s laws so check for yourself!
Choose wisely, your children's future may depend on it
You can always choose the type of trust that works better for you. However keep in mind these are decisions that will affect your children’s life too. There aren’t any easy answers here: you’ll need to see which of the above kinds of trusts is best suited for you and your loved ones.
Final Thoughts
There are many types of trusts and it’s important to know which one will work best for your situation. If you’re not sure, get in touch with a financial professional who can help you determine the type of trust that would be best suited for your needs.
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