Types of Trusts Used in Estate Planning
There are many kinds of trusts, and sorting through which one is right for your estate plan can feel a little like trying to figure out the best car to buy among the more than 240 models available in the United States. Fortunately, there are experienced estate planning firms who can take a look at your financial portfolio, clearly explain your options, and help you choose what works best for you. As a second generation, estate planning law firm in the Phoenix Metropolitan area, Phelps LaClair is ready and qualified to give you wise counsel on the types of trusts available.
A TRUST is a legal document that specifies how assets will be administered during the life of the trustee(s), and how assets will be distributed to beneficiaries after the death of the trust’s grantor/trustees.
We’ll begin with perhaps the two most common trusts, the Revocable Trust and the Irrevocable Trust.
In our last blog post, we defined the terms and meaning of a revocable living trust. If you have questions on the meanings of terms we use here, click on the link for those definitions.
Briefly, a revocable trust is created by the grantor (creator of the trust), to transfer titles and ownership of assets into the trust’s name. The grantor can choose to remove assets from the trust at any time. A revocable trust can also be called a living trust. One clear advantage of a revocable living trust is that upon the death of the grantor/trustee, this trust will avoid probate for the beneficiaries, providing a financial savings for them and immediate availability of the assets and funds of the trust. A revocable living trust usually becomes an irrevocable trust as soon as the grantor/trustee passes away.
As indicated by its name, once an irrevocable trust has been created, it cannot be changed. When property and assets have been put into an irrevocable trust, they cannot be removed, not even by the creator of the trust. One advantage of an irrevocable trust is that if you or your spouse need long-term care for whatever reason, the assets and property in the trust do not count toward your income when Medicaid looks at your portfolio (providing the trust was set up more than five years prior to your needing Medicaid).
Asset Protection Trust
We recently wrote about two types of asset protection trusts, the Veterans Asset Protection Trust and the Medicaid Asset Protection Trust. Both of these trusts are irrevocable trusts. Asset Protection Trusts can also be established for a specific length of time. In this case, after the term for the trust is completed, the assets of the trust return to the grantor/creator. Asset Protection Trusts can be created to protect assets from potential creditors. They can also be created to protect from Medicaid spend-down limits, should the grantor (or a spouse) need long-term care for any reason.
Special Needs Trust
A Special Needs Trust holds the titles to properties and assets for the benefit of a child or adult who has a disability. This kind of trust allows government benefits eligibility to be preserved while providing the special needs child with sufficient assets to meet supplemental needs (those that go beyond food, shelter, clothing and medical care).
Protective Inheritance Trust
Usually, a Protective Inheritance Trust (PIT) is coupled with your Living Trust. Rather than an outright distribution of funds, the PIT gives your beneficiary full access to their inheritance and flexibility in using the funds. But with a PIT in place, only the beneficiary can access the inheritance. It’s as if your beneficiaries are the only ones who hold the key to the vault of their inheritance. One value of a PIT is to protect your beneficiaries in case of divorce, lawsuits, and more. Click on the above link for more information about a PIT.
IRA Inheritance Trust
If you have an IRA (or company retirement plan), based on recent IRS regulations, you now have the ability to “stretch out” its income-taxable minimum distributions over a much longer period. It’s possible to do so over your lifetime, plus the lifetime of your children or your grandchildren. If your IRA Inheritance trust is set up as the primary or secondary beneficiary of your IRA (or company retirement plan), when you pass away your distributions are placed directly into your IRA trust. This allows the IRA assets to continue in a tax-deferred status. If your IRA continues to accrue interest, your beneficiaries will reap the benefit of receiving the income off of the principle. There are things your heirs will need to do in order to make this trust work, but for stretching your IRA to succeeding generations, the IRA Inheritance Trust can be quite effective. The above link will give you more information about an IRA Inheritance Trust.
There are other trusts that are more specific in nature, but these are the most common types of trusts used to give you the most for your money while protecting your assets. Certain trusts can be interpolated into existing trusts, to provide additional protection or advantage. Our staff at Phelps law in the Phoenix Valley is well-versed in the many types of trusts available. Knowing the right trust or trusts to meet your needs is our strength. If you live in our region, we invite you to contact us to discuss your needs, your portfolio, and your future plans.