When it comes to estate planning trusts, it’s important that you know exactly how to make trusts work for you when you are planning your estate. Of course, your estate planning attorney can help you to take care of all of the intricacies, but it’s also important that you know a little about trusts yourself. So today we’re covering the basics by explaining the different types of trusts.
Estate Planning Trusts: Understanding Different Types of Trusts
The Revocable Trust
This type of trust is also called a “living trust“. In this type of trust, you transfer the title to property that you own to someone else while you are the initial trustee. A revocable trust is so named because you have the ability to remove the property from the trust at any point during your lifetime. One of the most important things to know about the revocable trust is that they are often used to keep property out of probate because once put into a revocable trust, the property is then owned by that trust and not subject to the estate probate.
The Irrevocable Trust
The irrevocable trust is similar to the revocable trust, but as the name suggests, once your property is transferred to the trust, it cannot be removed from the trust. In some instances – usually when there is a large estate- survivorship life insurance benefits can be put into an irrevocable trust, but this use of the trust can have some pretty negative consequences.
The Asset Protection Trust
An asset protection trust is used to protect your assets from any creditor claims that may loom in the future. This type of trust is usually set up while you are still living to protect your existing assets when you suspect that creditors may try to make claims to those assets against your debts. Once the risk of creditors taking your assets has passed, the assets are then taken out of trust and control of them is returned to you.
The easiest to understand example of this is when wealthy figures transfer property into trusts overseas when they face insurmountable debt as a result of questionable activities.
This is generally not the type of estate planning that is part of the average person’s plan.
The Charitable Trust
There are different types of charitable trusts.
The most common type of charitable trust is called a “remainder charitable trust”. A remainder charitable trust is where you set up a trust and transfer the property that you want to donate to charity into that trust. Your charity of choice is then named as the trustee of the trust. The charity you choose MUST be an IRS recognized charity. The charity then invests or manages the property in the trust and this generates income, a portion of which comes back to you or someone whom you designate. When setting up your charitable trust, you can designate for how long a portion of this income should be paid to you or the individual you have designated to receive the funds.
This type of trust has tax advantages as well as makes you feel pretty good because you are donating to a good cause.
The Constructive Trust
A constructive trust is a trust that is “implied.” This type of trust is established by a court based on specific circumstances. This type of trust is not a “formal trust” but is usually established when evidence exists that points to the intention of the deceased person to have a specific property go to a specific person or to be used for a specific purpose even though it is not written in their will.
In this type of situation, it is possible for the actual legal title of a property to belong to one person while the equitable title of that property actually belongs to someone else.
The Special Needs Trust
A special needs trust is a trust that is set up to ensure that someone with special needs is not disqualified from receiving their government benefits as a result of an inheritance or gift. There are a few provisos to this type of trust, however, for example, the beneficiary must not have control over how frequently the trust distributions are made and they cannot revoke the trust.
The main purpose of this type of trust is to allow for the provision of “luxuries” for the special needs individual that they would otherwise not be able to purchase.
It is also important to note that a special needs individual who expects to receive a significant inheritance or another large windfall can set up their own special needs trust as long as someone else or another entity is named as the trustee.
The Spendthrift Trust
A spendthrift trust is established to prevent a beneficiary from selling or pledging away their interests in the trust. Property that is in a spendthrift trust is protected from a beneficiaries creditors until the property from the trust is distributed to the beneficiaries.
The Tax By-pass Trust
Although it sounds illegal, the tax by-pass trust is completely legal and is used to pass money from one spouse to another while limiting the amount of tax that is paid on the trust assets when the surviving spouse dies.
Here’s how it works – when one spouse dies, assets can be passed to their spouse tax-free, however, when the surviving spouse dies, assets that remain in that trust over a specified amount are taxable. This tax must be paid by the surviving children of the deceased. A tax by-pass trust limits the taxes that must be paid.
The Totten Trust
A Totten trust is a type of revocable trust that is created with a financial institution while you are still living. You make financial contributions to this trust during your lifetime and name yourself as a trustee of the trust for someone else or an entity. Upon your death (or upon the occurrence of a specific event), this “gift” is considered complete and the beneficiary receives the contents of the trust.
Totten trusts can only be used with financial assets – bank accounts, certificates of deposit, etc. and they are not subject to probate.
Do You Have Questions About Estate Planning Trusts?
If you live in or around St. Petersburg and have questions about estate planning trusts, Weidner Law can help, just call today at 727-954-8752. Attorney Matt Weidner and his team can help with all of your estate planning needs.