Which Type of Trust Is Right for Your Estate Plan?
Including a trust in your estate plan will keep your assets safe until your loved ones inherit them. There are many types of trusts to choose from, and understanding which kind of trust you need may seem overwhelming. The estate planning experts at Phelps LaClair can help you choose between the most common types of trusts or create a personalized trust that suits your individual needs.
What Is a Trust?
A trust is a legal relationship between the grantor (the person who holds the assets) and their appointed trustee. The grantor gives permission for the trustee to manage the assets held in the trust on the behalf of the beneficiary (the person or organization who will receive the assets). A trust legally protects the assets held within it, and ensures that the trustee distributes those assets according to the grantor’s final wishes.
If you die without a will or trust, your assets will go to probate court. Probate is the lengthy process of administering your estate, which can be a burden on your loved ones. Avoiding probate gives you control over who receives your assets when you’re gone, and also gives your family peace of mind.
Five Common Types of Trusts
1: Revocable Trust
Also called living trusts, the grantor of a revocable trust can modify or revoke the trust during their lifetime. As the grantor, you can name yourself as the trustee in order to manage the living trust assets yourself. You will also need to name a successor trustee who will manage your assets after your death.
The main advantage of a revocable trust is that you can continue to benefit from managing your assets throughout your lifetime. It gives you the assurance that your assets will remain protected for your beneficiaries and avoid probate. After you pass away, the trust becomes an irrevocable trust. As a result, the successor trustee will not be able to modify the trust or remove any assets without permission from the beneficiaries.
2: Irrevocable Trust
Unlike a revocable trust, an irrevocable trust cannot be changed or revoked at any time. Once placed in an irrevocable trust, no one—not even the grantor—can remove the asset until it is time for the trustee to distribute it to the designated beneficiary.
The assets in your irrevocable trust no longer belong to you. This means that creditors cannot go after those assets. Placing your assets in an irrevocable trust can also protect you against being disqualified from receiving government benefits. Holding assets in an irrevocable trust can help you avoid exceeding the income limitations for government assistance programs like Medicaid.
3: Charitable Trust
If you wish to leave some or all of your assets to a nonprofit organization, you can set up a charitable trust. There are two types of charitable trusts: charitable remainder trusts (CRTs) and charitable lead trusts (CLTs). Both types of charitable trusts are irrevocable.
A CRT allows you to distribute specific amounts to your beneficiaries, and whatever remains afterward to charity. With a CLT, the reverse is possible—you can leave a specific amount to charity and distribute the remaining funds to other beneficiaries.
4: Special Needs Trust
A special needs trust (SNT) is established on behalf of a loved one with a disability. SNTs allow you to financially provide for a loved one without affecting their eligibility for government assistance programs. Under the “Special Needs Trust Fairness Act,” people with a disability can establish their own SNT using their own income.
5: IRA Inheritance Trust
If you have an individual retirement account (IRA), you can “stretch out” the taxable minimum distributions over your lifetime. An IRA inheritance trust allows your beneficiaries to continue to benefit from your IRA for an additional 10 years after inheriting the account. However, your beneficiaries must take certain steps first. It’s important to consult with an estate planning attorney before creating an IRA inheritance trust. Doing so ensures you leave clear instructions that will help your beneficiaries take full advantage of your IRA.
Estate Planning Attorney in Mesa and Chandler
The estate planning attorneys at Phelps LaClair can help you choose the best types of trusts to protect your assets, no matter the size of your estate. If you have any questions about establishing a trust, please don’t hesitate to schedule a consultation with us. Call 480-892-2488 today to get started.