The ABC’s of Trusts

When trusts are mentioned, most individuals think of a revocable living trust. A revocable living trust is an agreement which provides instructions on how you wish your estate distributed upon your death.  The living trust is considered inter vivos meaning that it is created during lifetime and can be changed during your lifetime.  The purpose of a revocable living trust is to avoid probate, and allow for an easy administration of the estate without court supervision. 

Depending on your circumstances or goals, you may need a different type of trust.  I am often asked whether an irrevocable trust should be created.  As the name implies, this type of trust cannot be changed or modified after it is created, without obtaining a court order.  An irrevocable trust is appropriate if the estate value is higher than the federal tax exemption which is currently 11 million for each unmarried person and 22 million if they were married. 

If a client has a large number of assets, an asset protection trust may be appropriate.  This is a trust that protects an individual’s assets from future creditors.  These types of trust are structured so they are irrevocable for a term of years and the current trustor is not able to access the assets during the time period that the asset protection trust is in place.

For clients with charitable intent, a charitable remainder trust may be an excellent way for a client to leave assets to his or her charities of choice.  The client transfers the selected assets into the trust, the trustee sells the assets and there are no capital gains tax paid.  The trustee re-invests the assets into other income-producing assets.  During lifetime the trustee pays the trustor a lifetime income based on investment performance and the annual value of the trust.

If you have a child who receives SSI, then you may want to consider the preparation of a special needs trusts.  The trust assets are distributed to the special needs trust so that the special needs trust is not disqualified from receiving government benefits.  The special needs trust is designed to supplement the government benefits.  This is a useful tool to ensure that your beneficiary with special needs receives assets to pay for things not covered by their government benefits.

There is much confusion about types of trusts.  Which trust or combination of trust are appropriate, depends on your estate planning goals and value of the estate.

Source:  Affinity Trusts. Not affiliated with KeyPoint Credit Union.