There are many, many different kinds of trusts available and choosing the right one can be confusing. A trust is traditionally used to minimize estate taxes and avoid probate, saving beneficiaries time and expenses. Some trusts also allow people to control their finances while they are living, while others are aimed specifically at how assets are handled after death.
Most people — those without exceptional wealth — utilize some of the more common types of trusts listed below.
Revocable or “Living” Trust
A revocable or living trust ensures your assets are managed as you’d like them should you be unable to do so yourself. You continue managing your assets while you can but, should you become incapacitated due to injury or illness, a trustee of your choosing will be authorized to do so. The revocable or living trust also includes your wishes for how your assets are to be transferred when you die.
Generally, an irrevocable trust cannot be changed, altered, modified or revoked after it is executed. It has several purposes but is mostly used to move assets out of a deceased person’s estate to his or her beneficiaries. A trustee is appointed to administer the terms of the trust and distribute its assets. There are different types of irrevocable trusts, including asset protection trusts, which are designed to protect the person’s assets from claims of future creditors or lawsuits.
Other Types of Common Trusts
- Charitable Trust: A charitable trust is set up to benefit a particular charity or other philanthropic endeavor. There can be tax incentives and financial benefits, including a possible reduction in estate taxes. There are different categories of charitable trusts depending on the grantor’s goals.
- Special Needs Trust or Supplemental Benefits Trust: A special needs trust ensures that a beneficiary who receives Social Security, Medicaid or other governmental support because of a disability or other reason continues to collect those benefits. The trust allows the beneficiary to receive their inheritance without the amount of support being altered. A supplemental benefits trust is similar, but it is set up by a third party, such as the beneficiary’s parents, grandparents, guardian or the court.
- Credit Shelter Trust: A credit shelter trust is created after one spouse of a married couple dies so that the assets are held apart from the surviving spouse’s estate. This helps reduce or avoid estate taxes when the surviving spouse dies and the assets are passed on to heirs. It is a type of irrevocable trust, and the surviving spouse can retain certain rights to the trust assets during their life. Credit shelter trusts are also known as bypass, family, or exemption trusts.
- Disclaimer Trust: Similar to a credit shelter trust, a disclaimer trust allows a surviving spouse to transfer assets to a trust from the deceased spouse’s estate by disclaiming ownership of a portion of the deceased’s estate the surviving spouse would have inherited. This allows the assets to pass tax free to the beneficiaries after the surviving spouse’s death.
- Pet Trust: A pet trust ensures that a pet is cared for, both in terms of finances and “custody,” after its owner’s death.
Trust laws vary state to state and there are many factors to consider when drafting trusts. Please consult an attorney to ensure the right type of trust is being used for your estate. We can help. Click here or call us at 856.782.8450.