Beyond Basic Trusts: Unlocking The Potential Of Specialized Trusts For Estate Planning

Mar 27, 2024 | Estate Planning

To anyone considering the creation of an estate plan to protect your family and your assets, we applaud you! This is likely one of the most important things you could ever do to protect your family. 

Making and following through on your estate plan is a very thoughtful, caring, and wise decision. Not only will you spare your family the cost and agony of probate down the road, but you can also protect your assets from creditors and lawsuits today. This is a great reason to take action now, as opposed to waiting until it is too late.

There are multiple estate planning tools you can use to achieve your goals, each with a different purpose and use. We are directing our focus on trusts in this blog because they are some of the more powerful and versatile tools in the estate planning toolbox. 

You could think of a trust as a queen in chess—the piece that can move in many different directions and can be used to achieve many kinds of goals. That’s the beauty of a trust: it can be customized to do what you want it to do, and it can help protect your assets from creditors, avoid probate, provide for loved ones, and help you avoid or reduce estate taxes. 

Here, we’ll discuss the trusts that are most commonly used, as well as introduce you to specialty trusts that may be less well-known but, in your situation, could be of great use!

Trust Basics 101 

A trust is a legal contract involving one, two, or more parties. One of the parties involved (known as the trustor or grantor) conveys property to another party (known as the trustee), who agrees to hold the property for the third-party beneficiary (or beneficiaries) of the trust. The terms of their trust agreement, which outline the parties’ rights and obligations, are binding on trustees as well as beneficiaries because it is a contract. 

Some of the most common uses of a trust include estate planning, asset protection, support of minor children and other dependents, or charitable causes. When the trust agreement is created, the trustor relinquishes ownership of the property and transfers control to the trustee, based on the terms of the trust. The trustee manages the assets in accordance with the articles of trust and distributes them to the beneficiaries of the estate as stipulated in the trust agreement.

Why Create A Trust?  

Having a trust as part of your arsenal provides many advantages, including, but not limited to: 

1. Preventing probate: If a person dies with a will, a probate process will be required to prove the will is valid and to distribute the decedent’s assets to their beneficiaries. This process is time-consuming and expensive. A person who has a trust can prevent their assets from having to go through probate.

2. Privacy: Whereas probate is a public record, a trust is private.

3. Flexibility: A trust provides the flexibility for the grantor to decide when and how assets are distributed to beneficiaries. It’s particularly ideal when a grantor knows their beneficiaries are not financially sound.

4. Protection: Moreover, a trust can protect assets from creditors or lawsuits, ensuring that the intended beneficiaries receive their inheritance without interference.

5. Avoiding Taxes: A trust allows assets to avoid estate taxes or generate tax-free income.

Types Of Trusts 

There are two main types of trusts: 

  • A revocable trust, or living trust, is a trust that can be modified at any time by the grantor. This type of trust can be used to avoid probate because the grantor can create a revocable trust for the benefit of their heirs, and when they die, the trustee can transfer the trust assets to the grantor’s beneficiaries without court supervision. Because they have the power to revoke the trust or alter its terms at any time during their lifetime, the grantor can ensure that the people who stand to inherit include all of their loved ones (new grandchildren, etc.) and that the trust includes all of their assets. This flexibility is a great advantage of a revocable trust.
  • An irrevocable trust, by contrast, can never be revoked or modified. Once property has been placed in an irrevocable trust, it is no longer considered part of the grantor’s estate and is taxed differently. Irrevocable trusts are generally less flexible than revocable trusts, but they provide much greater asset protection and control over the dispersal of assets.

The advantages and considerations of each type of trust vary, so it is best to consult an experienced estate planning attorney who is knowledgeable in trust law to determine which type of trust is appropriate for your particular needs and objectives. 

What Are Specialty Trusts? 

There are several types of specialty trusts designed to serve specific purposes and cater to different needs that you might want to include in your estate plan; it just depends on what you’re trying to achieve! 

Here are some of the most popular types of specialty trusts:

1. Marital Trusts (“A” Trust)

One spouse establishes a marital trust (also known as an “A” trust) for the benefit of the other spouse, and upon the death of the first spouse, the surviving spouse receives the trust’s assets and any income generated from them. In turn, the surviving spouse is spared from paying estate tax on these assets while still living. Because they are part of the first spouse’s estate, the surviving spouse’s heirs have to pay estate tax on the trust assets that are eventually given to them.

2. Bypass Trusts (“B” or Credit Shelter Trusts)

Married couples can lower their estate tax liability by setting up a bypass or credit shelter trust (also called an “A-B” trust) for the benefit of their heirs. When one partner passes away, this irrevocable trust divides their assets and puts them in another trust. One trust can receive an amount equal to the maximum allowable under state or federal estate tax exemptions. The surviving spouse’s marital trust would receive any remaining funds following the application of all riders, exemptions, deductions, and allowances. Any assets that remain after the death of the surviving spouse are transferred to their beneficiaries without being subject to estate tax, though the surviving spouse may be entitled to the income from the remaining trust.

3. Charitable Trusts

Donating to charity through a charitable trust can help you leave a lasting legacy when you die. There are two types of charitable trusts: 

  • A charitable lead trust allows you to give some of your assets to one or more charities and leave the rest to your heirs when you die.
  • A charitable remainder trust lets you get income from some of your assets for a certain amount of time. After that time, the rest of your assets or the income from them will go to the charity of your choice.

4. Generation-Skipping Trusts

You can choose a generation-skipping trust if you would rather take care of your grandchildren than your children. A generation-skipping trust lets you give things to your grandchildren without your children having to pay estate taxes on them. In addition, you could make sure that your children have access to all of the assets’ income.

5. Grantor Retained Annuity Trust (GRAT)

Generally speaking, a GRAT has a short term. This strategy may be commonly used by those who want to lower the amount of taxes they pay on cash gifts to designated beneficiaries. Donating an asset allows you to support the trust and receive an annual annuity payment based on the asset’s initial valuation. When the term is up, all the remaining assets are passed on to your beneficiaries. Nothing in this is subject to gift taxes. This could be a good way to receive income payments now while also passing on some of your assets to loved ones.

6.  Life Insurance Trusts

A life insurance trust is a legally binding trust that you set up to hold the money from your life insurance policy. In your life insurance policy, you designate the trust as the beneficiary. When you die, the life insurance policy proceeds go into the trust. After that, the trustee will manage the funds so that your beneficiaries can profit. The advantage of having an irrevocable life insurance trust is that you can avoid estate tax.

7. Special Needs Trusts

A special needs trust can help support a parent, sibling, or child with special needs financially without affecting their ability to receive disability benefits. The money is put in a trust so that the person can enjoy and benefit from it. The money stays separate from the resources that can be used to get benefits. This way, the special needs trust can pay for the beneficiary’s medical care or other daily needs that they might not be able to get otherwise without affecting their ability to get government benefits.

8. Spendthrift Trusts

If you are worried that your heirs will waste their inheritance, a “spendthrift” trust can give you peace of mind. In this type of trust, you make sure that beneficiaries can only access the principal trust assets in ways that are allowed under the terms and conditions set forth by you in the trust agreement. The trust agreement may give you the power to appoint a trustee to manage the trust’s assets and distribute them to your beneficiaries according to your wishes.

9. Testamentary Trusts

A testamentary trust, also known as a will trust, is created through a last will and testament. A testamentary trust becomes irrevocable only after the testator, the person who created the will, dies. A testamentary trust’s primary goal is to restrict the availability of trust assets’ proceeds to beneficiaries to a predetermined window of time.

10. Totten Trusts

A Totten trust, named after the judge who created the concept, is called a payable-on-death (POD) account because the money you put into the account goes to the person you name as the beneficiary of the account when you die.

How An Estate Planning Attorney Can Help 

With so many different types of trusts out there and so many different life situations, it may be tough to figure out which trust is right for you. Hopefully, having read the above information, you have a better understanding of what trusts are and why they may fit into your estate planning strategy! 

But simply knowing what the queen’s function is on a chess board (i.e., the most powerful piece with the largest possible range of motion) will not necessarily make you a master chess player. Your best bet is to consult with a qualified estate planning attorney to ensure that the correct type of trust is created and tailored to your situation. 

At ProvenLaw, our dedicated team of estate planning attorneys can help you through the process so that you have all the legal tools necessary to safeguard your assets and to provide you and your loved ones with peace of mind. Book a free consultation today to learn more! 

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