Considering the myriad of trusts available, creating an estate plan that works can seem daunting. However, when you realize how different each life situation is, you can see the need for the many different types of trusts. A young married couple with a special needs child would often have different needs than an older single widow with three grown children.
Think about your own situation and ask yourself a few questions.
- Who are you saving for? Your own retirement? A beloved pet? All of your grandchildren?
- Are you considering a trust because you need to save for something specific?
- Are you preparing for possible long term care needs?
- Trying to create a tax shelter?
- Avoiding Medicaid ineligibility or keeping money away from Medicaid Recovery Efforts after you pass?
- Considering inheritance plans for an irresponsible loved one in your family who doesn’t handle money well?
- Trying to avoid probate court for your loved ones?
- Working to maximize inheritance and avoid death taxes?
Narrow down the type of trust needed by thinking about what your financial goals and personal situations are. Trusts can be a wonderful planning tool for those who have a specific goal, but it is also possible to make a simpler estate plan that includes your will, your medical power of attorney and a few other documents. Getting to know the different types of trusts can help you understand what is available and whether a trust could help you achieve your financial and personal goals.
Here’s a look at the basics of ten common trusts to provide a general understanding. There will not be a quiz at the end.
1. Bypass Trusts
Commonly referred to as Credit Shelter Trust, Family Trust, or B Trust, Bypass Trusts do just that: bypass the surviving spouse’s estate to take advantage of tax exclusions and provide asset protection.
2. Charitable Lead Trusts
CLTs are split interest trusts which provide a stream of income to a charity of your choice for a period of years or a lifetime. Whatever’s left goes to you or your loved ones.
3. Charitable Remainder Trusts
CRTs are split interest trusts which provide a stream of income to you for a period of years or a lifetime and the remainder goes to the charity of your choice.
4. Special Needs Trusts
SNTs allow you to benefit someone with special needs without disqualifying them for governmental benefits. Federal laws allow special needs beneficiaries to obtain benefits from a carefully crafted trust without defeating eligibility for government benefits.
5. Generation-Skipping Trusts
GST Trusts allow you to distribute your assets to your grandchildren, or even to later generations, without paying the generation-skipping tax.
6. Grantor Retained Annuity Trusts
GRATs are irrevocable trusts which are used to make large financial gifts to family members while limiting estate and gift taxes.
7. Irrevocable Life Insurance Trusts
ILITs are designed to exclude life insurance proceeds from the deceased’s estate for tax purposes. However, proceeds are still available to provide liquidity to pay taxes, equalize inheritances, fund buy-sell agreements, or provide an inheritance.
8. Marital Trusts
Marital Trusts are designed to provide asset protection and financial benefits to a surviving spouse. Trust assets are included in his or her estate for tax purposes.
9. Qualified Terminable Interest Property Trusts
QTIPs initially provide income to a surviving spouse and, upon his or her death, the remaining assets are distributed to other named beneficiaries. These are commonly used in second marriage situations and to maximize estate and generation-skipping tax exemptions and tax planning flexibility.
10. Testamentary Trusts
Testamentary Trusts are created in a will. These trusts are created upon an individual’s death and are commonly used to provide for a beneficiary. They are commonly used when a beneficiary is too young, has medical or drug issues, or may be a spendthrift. Trusts also provide asset protection from lawsuits brought against the beneficiary.
Seek Counsel
Choosing which trusts and other documents you need to plan your estate can be too much to make sense of. However, estate planning attorneys write estate plans every day. A knowledgeable estate planning attorney understands the laws regarding taxes, probate, medicaid, and each type of trust. Their focus is designing a plan which addresses your specific situation. Share your goals and insights with your attorney. An experienced estate planning attorney designs a plan that incorporates the best documents for your situation whether that includes a trust or not. Once your estate plan is drawn up, you will feel much more confident about your future plans. What are you waiting for?