When contemplating the addition of a trust agreement into your estate plan, you might find yourself overwhelmed by the variety of trusts available. Choosing the right type of trust is crucial for ensuring that the trust works as intended and fits into your estate plan as anticipated. Always consult with an experienced estate planning attorney before deciding which type of trust is best for your plan. In the meantime, an Indianapolis estate planning attorney at Frank & Kraft discusses how to know what type of trust is right for your estate plan.
Trust Basics
A trust is a legal relationship where property is held by one party for the benefit of another party. The person who creates a trust is referred to as the “Settlor”, “Trustor” or “Grantor.” The Settlor transfers property to a Trustee, appointed by the Settlor. The overall job of a Trustee is to protect and invest trust assets and to administer the trust terms found in the trust agreement. Trusts all fall into one of two categories – testamentary or living trusts. A testamentary trust is activated by a provision in the Settlor’s Will at the time of death whereas a living trust activates once all formalities of creation are in place and the trust is funded. Living trusts can be further divided into revocable and irrevocable living trusts.
What Type of Trust Should I Create?
- Testamentary Trust: A testamentary trust is created through a provision in your Last Will and Testament and only activates upon your death. This trust can provide for minor children, manage assets for beneficiaries who are not financially responsible, or address other specific needs outlined in your Will. Because this type of trust is not administered during your lifetime, it can be less expensive than other options.
- Revocable Living Trust: A revocable living trust is a flexible estate planning tool that allows you to manage your assets during your lifetime and distribute them after your death without the assets becoming involved in the probate of your estate. As the name implies, you can revoke or amend this trust at any time. Along with avoiding probate, a trust lets you maintain privacy when it comes to the details of asset distribution. Another important benefit to creating a revocable living trust is that it can be used as an excellent incapacity planning tool. If asset protection is among your goals, however, a revocable trust is likely not the right type of trust for your plan.
- Irrevocable Trust: An irrevocable trust cannot be modified or revoked by the Settlor once it is established, which is something you should understand and consider before choosing this type of trust. The irrevocable nature of the trust, however, is precisely what makes it an excellent asset protection and tax avoidance tool. By transferring assets into an irrevocable trust, you remove them from your taxable estate and protect them from creditors.
- Special Needs Trust: A special needs trust is specialized irrevocable trust that is designed to benefit a person with disabilities without affecting their eligibility for government assistance programs such as Medicaid or Supplemental Security Income (SSI). This trust ensures that your loved one with special needs has financial support while preserving their access to essential benefits. A special needs trust is governed by complex laws and regulations that must be taken into account when creating this type of trust. A properly drafted SNT, however, can be an invaluable addition to your estate plan.
- Charitable Remainder/Lead Trust: A charitable remainder or charitable lead trust allows you to donate to a charitable organization while providing income to yourself or other beneficiaries for a specified period. After the trust term ends, the remaining assets go to the designated charity or to the non-charitable beneficiary. This type of trust can be a powerful tool if philanthropy is important to you as well as for tax avoidance.
- Spendthrift Trust: A spendthrift trust protects beneficiaries from creditors and poor financial decisions by giving the Trustee discretion over distributions. This trust is useful if you have concerns about a beneficiary’s ability to manage their inheritance responsibly. It can also provide for staggered distributions instead of gifting a beneficiary a large lump sum inheritance.
Can We Help You Choose the Right Type of Trust for Your Estate Plan
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about which type of trust to create, contact an experienced Indianapolis estate planning attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
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