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Trusts can be valuable tools in estate planning, offering greater privacy and control over assets by keeping them out of probate. Trusts, as distinct legal entities from their grantors, may be exempt from some strictures applied to wills and other estate planning documents. This makes them especially useful for high-value estates or for those individuals in high tax brackets.
However, there is no one-size-fits-all trust that works for every individual. Different people may have different specific needs or different intentions when forming a trust. Therefore, understanding the types of trusts may help clarify which choice is right for the individual. In this blog post, we provide an overview of certain different types of trusts.
While many people opt for a will in their estate planning process, a trust may provide certain benefits that a will does not. In addition to these, varying types of trust may have their own unique benefits better suited to individual needs. The grantor who creates the trust will likely need to choose a type of trust that will have a certain effect on the beneficiaries of the trust.
Understanding the benefits of the various types of trusts may show which kind of trust is the right choice.
One of the more general benefits of trusts is their ability to avoid probate court and potentially alleviate some of the tax burden. When using a will, upon the death of the testator the will goes to probate, which may take up to six months and can incur probate taxes. As trusts are legal and financial entities separate from the grantor, this changes the way they come into effect upon the death of the grantor.
A trust will generally have one or more trustees who manage the fund while the grantor is alive, and the trust will also have an executor and instructions for how bequests are to be distributed. This allows trusts to skip over the probate process which may save time and money.
Probate records are generally available to the public, with a few exceptions, as they are legal proceedings and therefore public matters. The Family Search Catalog allows one to search past probate records. While this is not an issue for many, some people prefer a more private distribution of affairs. As most different types of trusts are exempt from the probate court process, they are generally found to be much more private than the alternatives.
In addition to these, trusts may also offer additional protection for assets in an estate plan. Creditors may have access to assets during a traditional probate process, and the estate may also be subject to litigation or long-term care costs. However, certain types of trusts may provide additional protection to help ensure that assets are being distributed per the grantor’s wishes.
For more information on the benefits of different types of trusts, consider speaking with a skilled estate planning attorney from Rhodium Law, LLC.
One of the more common types of trusts is the revocable trust. Sometimes called a living trust, these offer the benefit of added flexibility for grantors. They are called revocable trusts because the grantor is generally able to revoke the trust and adjust the terms and governing documents of the trust. Many grantors choose to name themselves as trustees of their own revocable trusts, allowing them an extra measure of control over the governing of the trust.
While revocable trusts have many benefits, there may also be some disadvantages in certain situations. Revocable trusts require the grantor to link their assets to the trust. Essentially, the grantor will retitle the desired assets in the name of the trust. Additionally, a revocable trust may not protect from long-term care costs.
Irrevocable trusts may provide many of the same benefits as living revocable trusts, however, the nature of these types of trusts allows for certain unique benefits. Irrevocable trusts, generally, are not able to be modified, revoked, or otherwise changed once the governing documents have been created. Not even the grantor can change aspects of the trust, save for exceptional circumstances.
As the grantor is no longer the owner of these assets that are property of the trust, this process may be able to help avoid estate taxes. In addition, the extra level of inflexibility can help protect assets and ensure that the original function of the trust is honored. However, their benefits may also have drawbacks. The inflexibility of the irrevocable trust may cause issues if the grantor or other party wishes to change the parameters of the trust. Additionally, taxes may need to be filed even after death on behalf of the trust, and rates may be higher.
While revocable and irrevocable trusts are generally the most common, there are a myriad of other types of trusts. Each one has a specific function that gives unique benefits to the parties involved or carries out a highly specified function.
A testamentary trust is often used in conjunction with a will. While wills bequeath their gifts after the death of the testator, trusts are not so limited. Testamentary trusts use this to their advantage to allow a trustee to manage and bequeath assets to an heir who is not yet capable of managing their own assets. This permits greater control over how assets are given to a minor or young beneficiary.
Similar to testamentary trusts, special needs trusts also allow for the care and financial management of beneficiaries continuing after the death of the grantor. However, according to the Mahoning County Probate Court, these trusts are specifically tailored to those with special needs, whether they be physical or mental needs. A special needs trust may allow for the beneficiary to continue to benefit from governmental assistance programs, while still giving them access to the inheritance or allowance provided by the trust.
Charitable trusts are made for the benefit of certain charitable organizations of the grantor’s choice. Not only do these funds support the betterment of society, but they may also provide helpful tax perks in certain circumstances. There are also many types of trusts within the charitable trust category, each having its own advantages.
Trusts are a valuable and effective tool in estate planning. However, due to the vast range of trusts to choose from, knowing which one best suits the needs of the individual may be difficult. In addition, the wrong trust may lead to financial frustration and complications in the future. A skilled estate planning law firm like Rhodium Law may be able to help explain which trust is right for your circumstances. Consider scheduling a consultation today by calling our office at (216) 699-8145, or visiting our website.
