There are many variations of trusts and the type you need is based solely on the goals you are looking to achieve.
The first thing you need to know is that a trust can be either revocable or irrevocable.
REVOCABLE TRUST (also called a “Living Trust“)
A revocable trust is created during your lifetime and usually takes effect upon disability or death. It can be changed or revoked at any time. The main benefit is the flexibility it offers. In many cases, Living Trusts serve as a will substitute. They are used together with a pour-over will to name guardians for minors and to make sure all assets pass to the trust.
During your lifetime you retain control of the assets you put in the trust (typically the grantor serves as trustee). The assets are included in your taxable estate since they remain under your control. The trust then becomes irrevocable upon death.
If the goal is to reduce estate taxes or avoid creditors, the trust must be irrevocable. An irrevocable trust takes effect immediately and can be changed only in very limited circumstances or by court order. Therefore, it’s important for your estate planning attorney to include as much flexibility as possible when the trust is created.
A key feature of irrevocable trusts is that the assets belong to the trust so that they are not included in your gross estate for tax purposes since they are no longer owned by the grantor.
GOAL SPECIFIC TRUSTS
Beyond being revocable or irrevocable some trusts are designed to meet specific needs. Below are the most common goal-specific trusts.
Credit Shelter Trust
The purpose of the credit shelter trust is to receive assets from your estate after your death. These assets will be sheltered from the estate tax. Typically, this type of trust is structured so that upon death, the assets are transferred to the trust for the benefit of the trust beneficiaries. This allows assets passing to the trust to escape estate tax on you and your spouse’s estate. This type of trust can also protect assets from creditors and the costs of long-term care.
Special Needs Trust
A key consideration in estate planning is how an inheritance would affect the beneficiaries. Would it affect their ability to qualify for Medicaid or other publicly funded disability programs? A special-needs trust can allow for needs not covered by government assistance, things that improve a person’s quality of life, like vacations and entertainment.
Qualified Terminable Interest Property (QTIP) Trust
A QTIP trust helps address the needs of blended families. It allows you to provide for your surviving spouse while controlling how the trust assets are distributed after they pass. For example, you and your spouse both have children from previous relationships; you can leave assets to a QTIP trust to provide for your spouse, and upon his or her death, the assets could then pass to your children.
Irrevocable Life Insurance Trust (ILIT)
An ILIT is a trust funded by one or more insurance policies. Even though a life insurance death benefit is not subject to income taxes, it is considered part of your estate for estate tax purposes if you own the policy at death. Thus it could use a large portion of your estate tax exemption if owned personally.
An alternative is to establish an ILIT and name a trustee. Once established, you give the trust a cash gift used to purchase the life insurance policy with the trust as the owner and beneficiary. Upon your death, the trust receives the death benefit, free of taxes. It then makes distributions according to the terms of the trust.
Many individuals use charitable trusts to leave all or a portion of their estate to charity when they die, both for philanthropic purposes and for certain tax benefits. Charitable trusts may be set up inter vivos (during a donor’s life) or as a part of a trust or will at death (testamentary).
There are two basic types of charitable trusts. The first is a “lead” trust, wherein the charity is paid first, and the remainder, after trust termination, goes to beneficiaries, such as heirs or back to the donor. The second is a “remainder” trust, wherein the charity is paid last following termination of the trust after other beneficiaries have received payments. Payments may be fixed amount, annuity trust, or a percentage of principal, which is called unitrust.
Charitable remainder trusts are irrevocable structures established by a donor to provide an income stream to the income beneficiary, while the public charity or private foundation receives the remainder value when the trust terminates.
If you would like to discuss the pros and cons of setting up a trust for you or another please contact Tarris Law at (540) 319-4111 or email us at info@TarrisLaw.com.