Understanding Trusts: An Overview

Understanding Trusts: An Overview 

Trusts are essential legal instruments that play a crucial role in estate planning, providing a structured way to manage and distribute assets according to your wishes and to the beneficiaries you designate. This article aims to offer an overview of several types of trusts, their benefits, and considerations when creating them. In later articles, I will highlight specific types of trusts. Always seek expert guidance when dealing with trust-related questions. The consequences of proceeding otherwise are much too costly.  

What is a Trust? 

A trust is a legal arrangement where one party, known as the trustee, holds and manages assets on behalf of another party, the beneficiary. Trusts can be tailored to meet specific needs and goals, making them versatile tools for estate planning. In fact, I often describe trusts as one tool in the estate planning toolbox. Yes, many options exist in the toolbox. The aim is to choose the right estate planning tool for the goal we want to achieve. Usually, a trust is the best option.  

Types of Trusts: 

A common misconception is that every trust is alike. But that’s far from the truth. Vast differences exist from one trust to another. This versatility and flexibility allow us to structure a trust to meet our needs, which makes them the right tool in our estate planning toolbox. A description of the most common trust types is below. 

Revocable Living Trusts 

A Revocable Living Trust, commonly referred to as a Living Trust, is established during the creator’s lifetime and can be altered or revoked at any time. It provides flexibility and control over assets, allowing the creator to manage their assets without the need for probate —a lengthy and expensive court process. Additionally, with a Living Trust, we can accomplish tax saving and asset protection for current and future generations.  

Irrevocable Trusts 

In contrast to a Living Trust, which allows for regular and unrestricted changes, an Irrevocable Trust offers less flexibility, as it generally cannot be modified or revoked once created. When contrasted with a Living Trust, an Irrevocable Trust is unchangeable. That characterizes an important difference that should always be kept in mind when considering which trust type best fits our goal. But an Irrevocable Trust isn’t entirely carved in stone. In fact, we can build a pathway for making changes to the Irrevocable Trust. Additionally, state law provides alternative pathways to change an Irrevocable Trust. They are usually more restrictive, but still available. 

Special Needs Trusts 

Another type of trust is a Special Needs Trusts, sometimes called a Supplemental Needs Trust. A Special Needs Trust is designed to provide benefits for individuals who have limitations or disabilities without affecting their eligibility for government benefits like Medicaid and SSI. There are a few different types of special needs trust: 

• First Party Special Needs Trusts: Funded with the beneficiary’s own assets, these trusts allow the beneficiary to receive benefits from the trust without losing government assistance. However, any remaining assets at the beneficiary’s death must reimburse Medicaid for what Medicaid paid on the beneficiary’s behalf. 

• Third Party Special Needs Trusts: Funded by someone other than the beneficiary, these trusts do not require reimbursement to Medicaid and can distribute remaining assets to other beneficiaries. As you might imagine, this type of Special Needs Trust is preferred whenever it can be used. With proper planning, it is possible to avoid the need for a First Party Special Needs Trust, allowing the creation of a Third Party Special Needs Trust instead. 

Conclusion 

Trusts are powerful tools in the estate planning toolbox, offering flexibility, control, and protection of assets. Whether you’re well-versed in trusts or just beginning to explore them, understanding the different types—such as a Revocable Living Trust, an Irrevocable Trust, a Special Needs Trust, or naming a trust as an IRA beneficiary—is essential for their proper use and effective implementation. Contact Us  to determine the best trust arrangement for your needs.