Estate planning concerns include
- transferring wealth to your spouse, children and grandchildren
- minimizing estate taxes
- making provision for a helpless child
- making provisions for your own incapacity
- maintaining privacy
- protecting assets
- giving to charity
To address these concerns effectively, you often need an entity other than you or your spouse to hold assets, distribute money correctly, and carry out your wishes when you no longer can. That entity is a trust (the most common type of trust being a living trust).
A trust is a legal entity - just like a person or a corporation. It holds assets for the trust's beneficiary. A trust document states the purpose of the trust and how that purpose is to be carried out. A trustee is the person that carries out the provisions of the trust. The grantor (you) creates and generally funds the trust. That's it!
Each trust is specifically fashioned to achieve its purpose. And that's what we want to overview so you'll be aware of the type of trust you may want. As a quick example, a trust can be fashioned to take care of the needs of a child with a disability (called a "special needs trust").
First off, trusts fall into two main categories: testamentary and inter vivos.
A testamentary trust is one created by your will. You specifically set up your trust within your will. It's officially created at your death when your will comes into effect. On the other hand, an inter vivos trust is created by you while you're living (thus the term, "living trust").
You can make an inter vivos trust either revocable or irrevocable. A revocable trust (often called a 'living trust') can be revoked or dissolved by you at any time for any reason. In sharp contrast, an irrevocable trust can't be revoked. It remains permanent and works only according to its written provisions carried out by the trustee. You have no control over an irrevocable trust once it's been created (executed).
With that said, let's look at the purposes of some common trusts:
The living trust – although able to be revoked – is seen as a different legal entity from you – and named accordingly. Assets you put into it are re-titled as owned by the trust – not you. You can use it to avoid the time and publicity associated with the Probate Process at your death, since the probate process only deals with property in your name alone.
Since the living trust is revocable by you (and therefore essentially controlled by you), the government taxes the trust's property as if it was yours. So, living trust assets don't avoid your income or estate taxes. It all is taxed under your name! The only objectives they satisfy are keeping your estate private and avoiding probate.
Irrevocable trusts are used when it's important that property put in them is no longer controlled by you. Incidentally, all testamentary trusts are by definition irrevocable.
The table lists some common trusts and their purposes.
|Trust name||Purpose||Inter vivos or testamentary||Why a trust?|
|Living Trust||Avoid probate||Inter vivos
|Need entity other than person for privacy|
|Living trust||Handle property through trustee||Inter vivos revocable||Allows trustee to take over if grantor unable or dead|
|Medicaid trust||To receive assets 5 years prior to applying for Medicaid||Inter vivos irrevocable||Medicaid patient can't own or control assets to qualify for Medicaid|
|ILIT (intervivos Life Insurance Trust)||To own life insurance on person with benefit to nonestate beneficiaries||Inter vivos irrevocable||If person own's life insurance, its proceeds go to his estate at his death|
|Charitable Remainder or Lead Trusts||To give to charity for deduction benefits and still benefit donor for living expense or beneficiaries at death||Inter vivos irrevocable||Need trust to hold assets and fulfill government obligations for tax deductions|
|By-pass trust (credit shelter trust)||To hold assets for estate exemption of deceased; earning can be used for spouse||Testamentary||Protects the deceased's estate tax exemption|
|Supplemental Needs Trust||To hold assets for disabled child on Medicaid for nonsupport help||Testamentary||Child can't control assets or will lose Medicaid assistance|