Some people may have preconceived notions about trusts and believe that they are only for multi-millionaires who wish to leave large trust funds to their children. However, trusts can be invaluable tools in the estate plans of millions of individuals.
Trusts are simply an arrangement where one party holds property on behalf of another party. In an estate planning context, trusts are created by the person doing the estate planning (the settlor), who authorizes another person (the trustee) to manage the assets for the benefit of a third party (the beneficiaries). There are many reasons for establishing trusts including tax minimization or providing for the needs of underage beneficiaries.
Some types of trusts that may be useful in an estate planning context are:
- Trusts for minors. As part of estate planning, many individuals leave money to their children or their grandchildren in a trust. This is typically done to insure the money is there for the children’s benefit while they are younger, for support, education, medical expenses, etc. Once the children reach a certain age or a certain achievement level (such as obtaining a bachelor’s degree), they may receive money from the trust to do with as they please.
- Special needs trusts. Special needs trusts are tools that enable a person to leave property to an individual with special needs. Many individuals with special needs receive government benefits. If they suddenly inherit money, they would be disqualified in most cases from those benefits until the inheritance was spent. Special needs trusts protect those individuals’ government benefits while allowing them to have money for extras they may need.
- Marital trusts. Married couples sometimes include trusts in their wills, or separately, for the benefit of their spouse, typically for two reasons: (1) taxes, and (2) property protection. In previous years, marital trusts were needed for some couples to take advantage of estate tax exemptions, and they may be needed in the future as the laws change. Marital trusts can also protect property from a spouse to ensure that it ultimately goes where it needs to go – for example, a husband with grown children from a previous marriage may decide to let his wife use his property after he passes, but puts it into a trust so that after she passes away, it goes to his children.
- Revocable living trusts. Revocable living trusts are documents completely separate from wills. They sometimes work hand in hand with wills to carry out the decedent’s wishes. Revocable living trusts are primarily used to avoid probate in states where probate is particularly cumbersome, or in a few other instances, such as where a person owns real estate in multiple states.
- Irrevocable life insurance trusts. Irrevocable life insurance trusts (or ILIT’s) can be used in order to get a person’s life insurance proceeds outside his or her estate for estate tax purposes.
- Spendthrift trusts. Spendthrift trusts are generally established to protect the beneficiaries’ assets from both themselves and creditors. These trusts usually have an independent trustee which has complete discretion over the distribution of assets of the trust.
- There are many different types of trusts, each of which can be customized to serve a valuable purpose in accomplishing the wishes of those making gifts or planning an estate.