What Type of Trust Should I Set Up?
When you’ve worked hard to build up your assets, you want to make sure that they smoothly pass on to your beneficiaries when the time comes. The absence of an estate plan can lead to tax burdens, probate costs, and even conflict for your family members.
Although a will is an essential part of the estate planning process, a well-executed plan should also include one or more trusts. A trust is an estate planning tool that allows you to authorize another party – the trustee – to handle your assets for the benefit of your beneficiaries. Contrary to what you might think, trusts are not only for the wealthy. Almost anyone can benefit from the layer of protection a trust offers.
But how do you know what type of trust is the best one for you and your family? This article will examine the most common types of trusts to help you make the best decision.
Revocable vs. Non-Revocable?
First, while there are many different types of trusts, they all fall under one of the two main headings – revocable or irrevocable.
With a revocable trust, you, as the grantor (the person who creates the trust), maintain control of the trust. That means you can end the trust – often called a living trust – or change it as often as you like during your lifetime.
When you create an irrevocable trust, however, the assets are no longer yours; they belong to the trust. Tax considerations are the main reason most people set up Irrevocable trusts. Additionally, irrevocable trusts offer protection for people working in litigious professions, such as doctors or lawyers.
What are the Different Types of Trusts?
Most trusts can be set up as either revocable or irrevocable, depending on your individual situation. Now, let’s look further at the different trust categories that are available to meet your needs.
A Joint Trust allows two people, such as a married couple, to establish a trust together. Each person has the ability to retain control over the assets while they are alive. If one person passes away, the surviving partner automatically becomes the trustee.
A Charitable Trust is one set up to benefit a charitable organization of your choosing. This type of trust offers some tax benefits while still generating income. Assets placed in the trust are no longer considered as your personal assets, so they are not subject to estate taxes.
Special Needs Trust
A Special Needs Trust is a way to provide financial security for someone under the age of 65 who is physically or mentally disabled and requires life-long care. This type of trust does not jeopardize the beneficiary’s eligibility for supplemental government aid in the form of Social Security Income (SSI) or Medicaid.
Asset Protection Trust
An Asset Protection Trust can help keep your assets away from creditors. If you file for bankruptcy or default on a debt, the assets in this type of trust won’t be included in legal proceedings.
An AB Trust is used to minimize the impact of estate taxes on married couples. When the first member of this joint trust passes away, the trust divides into two parts. The “A” Trust then becomes the surviving partner’s trust, and the “B” Trust becomes the trust for the decedents.
With a Bypass Trust, you can leave estate tax-free assets to your surviving spouse. After your spouse passes away, the assets will also bypass the estate tax, going directly to the trust’s beneficiaries.
A Blind Trust may be the right choice if you anticipate any conflicts of interest among your beneficiaries. With this trust, the beneficiaries have no prior information about the assets held within the trust. Your trustee has full discretion over all of the assets and their distribution.
You set up this revocable trust with your bank by filling out the necessary paperwork and naming a Payable-on-Death (POD) beneficiary. A Totten Trust allows you to retain control of the bank account during your lifetime, and it does not go through probate after your passing.
An Insurance Trust has an insurance policy as its only asset. This trust is a way to avoid estate tax on money from the policy paid upon your passing.
A Spendthrift Trust typically is used when the heir is either young or has been financially irresponsible. This type of trust allows your trustee to distribute your assets to your heirs over time rather than in one lump sum. Another advantage is that the funds held in this trust are not considered part of your beneficiary’s assets until they are disbursed, meaning creditors can’t access the money in the event of bankruptcy or loan default.
With a Qualified Terminable Interest Property Trust – known as a QTIP Trust — income from the trust is paid to a surviving spouse, but the remaining funds are held in the trust until the surviving spouse passes. Then, the remaining funds are paid to beneficiaries.
Credit Shelter Trust
Usually seen as an option for the affluent, this trust can reduce or even eliminate estate taxes as assets passed on to their beneficiaries. This irrevocable trust is set up so that upon the grantor’s death, the assets and the income they generate are transferred to the surviving spouse. Medical or educational bills can be covered not only by the trust’s income but also by its principle. After the surviving spouse passes away, the assets can be transferred to the final beneficiaries without prompting estate taxes.
Learning about your estate planning options is a crucial way to plan for both your financial future and the future of your loved ones. If you have any questions about trusts or any aspect of estate planning, please give the Circleville estate planning attorney at O’Leary Law Office a call today.
We have worked with many Ohio families to create thoughtful and comprehensive estate plans. Contact us today to find out more about how we can protect your family!