As part of your estate planning, your attorney may suggest you create a trust. There are different types of trusts and one or more may appeal to you as the best method for passing on your assets to your heirs upon your death.
Although trusts have traditionally been used to avoid the necessity of probate, other tools are available for that purpose. The attorneys at Springer & Lyle can help you understand the options and what determine what will best accomplish your needs.
What is a Trust?
A trust is created for the purpose of having an account managed by a person or organization for the benefit of another. There are three parties to a trust:
- Trustor or Grantor. The person who creates the trust and has the legal right to transfer property into the trust.
- Trustee. The individual or organization who is given the authority to manage the trust assets and ensure the wishes of the trustor are followed.
- Beneficiaries. Those who benefit from the assets that are placed into the trust. There may be one or more beneficiaries.
The trustor and beneficiaries all benefit from the creation of a trust which passes the trustor’s assets to the beneficiaries without them going through probate. Heirs also generally benefit from savings on taxes, as trusts are frequently used to minimize taxes.
Types of Trusts
There are several types of trusts, all used to accomplish different purposes. You can create one trust or several depending on your particular needs. The trust can be customized and combined; for example, a married couple may create a living revocable trust that becomes irrevocable upon the death of the first spouse. The main types of trusts include:
A Living Trust. Assets are transferred into the trust and are used by the trustor during their lifetime. After death, the assets are transferred to the designated beneficiaries. The benefits of this type of trust are:
- The trust can make provisions for end-of-life care for the trustor.
- Assets are immediately transferred to the beneficiaries upon the death of the trustor.
- Spouses can provide for the surviving spouse while preserving the remaining assets for distribution to other heirs.
A Revocable Trust. The grantor transfers assets to the revocable trust so the trust is the owner of the real estate, bank accounts, investment vehicles, for example, and not the grantor. The grantor can amend or revoke the trust at any time and transfer assets in and out of the trust. When the trustor dies, the assets pass to the beneficiaries according to the terms established by the grantor.
An Irrevocable Trust. The grantor transfers assets to the trust and cannot make any changes to the trust once it has been established. This trust has more tax advantages than a revocable trust but has the downside of being, as it is called, irrevocable. This trust is often used as people age to allow them to qualify for government benefits without exhausting their entire life savings and assets.
A Special Needs Trust. A special needs trust allows a grantor to provide for long-term care of a special-needs or mentally incapacitated heir, whether a minor or an adult. The heir does not lose access to public funding for his or her care if the assets are in this type of trust.