Estate planning is a process that can seem overwhelming at first glance, but it is one of the most important things you can do to ensure that your wishes are respected in the event of your illness or death. Unfortunately, many people miss this important opportunity and have chosen to avoid this planning altogether. A recent survey found that only 32% of Americans have an estate plan. Whether this is due to a misconception that estate plans are only for the wealthy, or if it’s uncomfortable for some to address matters that involve end-of-life planning, everyone should consider having one regardless of financial status. While an individual’s needs will dictate how a comprehensive estate plan is structured, some of the documents that might be included are a last will and testament, a health care proxy, a living will, a power of attorney, and beneficiary designations. Estate planners may also recommend including a trust.
All Estate Planning Trusts Fall into Four Categories
There are dozens of types of trusts that can be used as part of an estate plan that will help to protect assets, minimize tax implications, transfer wealth to heirs and avoid what can be a long and expensive probate process. Your financial advisor or a certified estate planner can help you understand all your options when you are beginning your will and estate planning, but a good place to start is by familiarizing yourself with the different types of trusts.
All trusts can be placed into four “parent” categories. There are living trusts, testamentary trusts, revocable trusts, and irrevocable trusts. The time of a trust’s creation, as well as whether it can be modified or revoked determines the type of trust it is. Living trusts are created while the individual who is setting up the trust (the grantor) is still alive, whereas a testamentary trust is established after an individual’s death in accordance with their last will and testament. Additionally, all trusts will be considered revocable or irrevocable. A revocable trust can be changed, or “revoked.” In most cases an irrevocable trust cannot be changed, although under certain circumstances it may be modified with beneficiaries’ consent or court intervention.
- A living trust is set up during an individual’s lifetime and can be either revocable or irrevocable. This type of estate planning trust may also be called an inter vivos trust.
- A testamentary trust is set up after an individual’s death in accordance with a last will and testament. They are irrevocable because they are created after the death of an individual. Any changes must be made by altering the will of the trust’s creator before they die.
Types of Trusts Commonly Used in Estate Planning
With lots of different trusts available, the best estate planners will look closely at an individual’s needs to determine the most suitable options. In managing an estate plan, there are many factors to consider. Is there a spouse or children who will need to be financially secure in the event of a grantor’s passing? Are there assets that must be protected? What about charitable causes, or even leaving assets for heirs who may not have a positive history in how they manage their money? A trust can even be established to cover funeral costs and ease the financial burden left on grieving loved ones. Here are some common trusts:
- Joint Trust. This type of estate planning trust allows married couples to manage and distribute their assets together while maximizing estate tax exemptions.
- Family Trust. This trust ensures that a family’s wealth is distributed according to the grantor’s wishes. It facilitates the transfer of assets to beneficiaries while allowing for the family members to avoid the probate court process.
- Credit Shelter Trust. This is a bypass trust that allows spouses to shelter assets to minimize estate taxes. This protects assets for beneficiaries and provides for the surviving spouse.
- Charitable Trust. Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) are both irrevocable trusts that can be established to support qualified charitable organizations as well as beneficiaries.
- Life Insurance Trust. This allows more control regarding how funds from a life insurance policy will be used for beneficiaries. The policy’s proceeds are kept outside of the insured’s taxable estate, and it protects proceeds from creditors.
- Spendthrift Trust. A trustee makes distributions to beneficiaries at their discretion to protect the assets from financial irresponsibility or potential legal issues.
- QTIP Trust (Qualified Terminable Interest Property Trust). This trust provides for a surviving spouse and directs control of how assets will be distributed to any remaining beneficiaries after that spouse has died.
- Asset Protection Trust. This trust can shield assets from claims by creditors or lawsuits. Asset protection trusts are typically established in offshore jurisdictions where there are creditor-friendly trust laws.
- Totten Trust (Payable-on-Death Account). This is a trust in which a bank account is established in a depositor’s name with a beneficiary named as well. The bank account owner has full control of the account during their lifetime, but the account automatically transfers assets to the named beneficiary upon the grantor’s death.
- Special Needs Trust. In the circumstance where a beneficiary may have disabilities and they receive Medicaid or Supplemental Security Income, assets that are held in this trust will not impact their eligibility for government benefits.
- Blind Trust. This trust can be helpful for those who want to separate their asset management from their official duties. A designated independent trustee manages the assets on the owner’s behalf. Those who serve in public office may use blind trusts.
- Generation Skipping Trust. This trust can be used to minimize estate or inheritance taxes by “skipping” your children and leaving assets to grandchildren or others who are at least 37.5 years younger than you. Caps and restrictions apply, but this trust can help heirs avoid paying estate taxes twice on assets.
- Medicaid Asset Protection Trust. At age 65 you will have Medicare for health insurance, but it does not cover long-term nursing home care. Medicaid does cover these costs, but you must meet financial requirements to receive this coverage. You can place assets into this irrevocable trust to potentially qualify for Medicaid.
- House GRIT (Grantor Retained Interest Trust). This irrevocable trust allows a grantor (person who created the trust) to transfer assets (their home) into the trust while retaining the right to use the property for a period of time. After the specified period, the trust assets are gifted to the beneficiaries at a discounted value and lease provisions are included to allow the grantor(s) to pay rent to stay in the home.
What Are the Benefits of Using Trusts in Estate Planning?
Trusts are a tool that can help you continue to provide for your loved ones when you are no longer able. They are one component of a complete estate plan that takes into account the most efficient tax strategies while establishing a pathway to smoothly transfer your assets to your heirs. Depending on the trust or trusts that your financial advisor or certified estate planner recommends, you may keep your property away from the probate process and eliminate or reduce certain estate taxes. By using a trust, you can ensure that your wishes are carried out properly, and that your beneficiaries who may need assistance or guidance can be helped by your appointed trustee. Trusts can give you peace of mind that you have reduced the burden that may fall on your loved ones after your death.
How do I find an estate planner near me who can help me set up a trust?
Your family’s financial means, the assets you’ve worked hard to grow, and how you want your assets distributed upon death will be unique to your life, and your comprehensive estate planning should be customized to reflect that. There are many variables to think about and you want to make sure you fully understand all the tools, trusts, and options that are available before making any decisions. At Frisch Financial Group, our advisors can review your financial plan and help you to determine which trust or trusts might be best to include in your estate plan. Please contact us to learn more.
