Many people establish trusts as part of their estate plan. A trust is an arrangement in which the trustor gives another person, known as the trustee, the right to hold the trustor’s assets on behalf of beneficiaries. Establishing a trust ensures that the assets are distributed to the right beneficiaries after the death of the trustor.
It is also much easier and less time-consuming for the beneficiaries to settle the trustor’s estate if a trust has been established. It’s important to learn about the different types of trusts so you can decide which one is the right fit for your needs. Here’s an overview of the main types of trusts: Revocable vs. Irrevocable Trusts Every living trust is classified as either revocable or irrevocable. A revocable trust is often referred to as a “living trust” because the settlor is still alive.
The main difference between a revocable and irrevocable trust is the right of the trustor to make changes to the arrangement. The trustor has the right to make changes to a revocable trust, but cannot –with only a very few exceptions — make changes to an irrevocable trust. A revocable trust generally becomes irrevocable upon the settlor’s death. There are pros and cons to both revocable and irrevocable trusts. A revocable trust gives the trustor more flexibility, so he can remove assets from the trust if he needs them later on in life. But, a revocable trust does not help the beneficiaries avoid estate taxes and creditors since the trustor still technically owns the assets in a revocable trust at the time of his death.
The irrevocable trust does not offer the same flexibility as the revocable trust, however it does help beneficiaries avoid estate taxes and creditors. Revocable trusts are routinely used as estate planning tools for individuals. Settlors generally appoint themselves as trustee during their lifetimes, so they remain in control of their assets. However, upon their death, their estate plan takes effect without the need for Court intervention. The irrevocable trust does not offer the same flexibility as the revocable trust, however it does help beneficiaries avoid estate taxes (in the case of large net worth individuals) and creditors.
A common concern is the loss of all assets to the cost of assisted living or nursing home care in our last years. Medicaid currently has a five year lookback period on irrevocable trusts. This means planning must be done years in advance, not months, to avoid that particular situation. Generation-Skipping Trust A generation-skipping trust can be established if a trustor would like to pass the ownership of his assets to beneficiaries that are separated from the trustor by at least two generations. For example, if grandparents want to leave their assets to their grandchildren, they could establish a generation-skipping trust. Qualified Terminable Interest Property Trusts A qualified terminable interest property trust allows the trustor to leave his assets to his surviving spouse and then control how the remaining assets are divided after his spouse dies. This type of trust is common among people who are currently married, but also have children from another marriage.
Setting up a qualified terminable interest property trust allows these individuals to provide for their surviving spouse as well as their children. Special Needs Trust Establishing a special needs trust is recommended if the beneficiary receives disability benefits from the government. This is because an increase in the beneficiary’s income or net worth typically affects their eligibility for disability benefits. However, trustors can ensure their beneficiaries do not lose access to government benefits by setting up a special needs trust. The assets in the trust can be used to pay for anything the beneficiary needs, such as travel, healthcare, and education.
The assets should not be used for food or shelter expenses, but if they are, this could affect the beneficiary’s government benefits. Qualified Personal Residence Trust A home is quite often the largest asset in an individual’s estate. A qualified personal residence trust allows the settlor to remove their home from their probate estate. This can help the beneficiaries avoid the cost, paperwork, and delay occasioned by the probate process. Instead, the home can be immediately transferred or sold, as directed by the trust. Further, the use of a trust does not impact the benefit of a stepped up basis upon the owner’s death. This will be especially beneficial if the settlor has a property that has appreciated in value significantly before his death. Are you interested in setting up a trust? If so, let our experienced estate planning attorneys explain which trusts are appropriate for your needs. Our team will create a thorough and detailed estate plan to ensure your beneficiaries are provided for after your death. Contact The Nice Law Firm at 317-269-7311 to schedule a consultation regarding your needs.