A trust is a powerful estate-planning tool for seamlessly transferring wealth to beneficiaries, avoiding probate and minimizing estate taxes. With a trust, you can protect your legacy and closely manage fund distribution. Different types of trusts suit different purposes, and the right trust for you depends on your situation, beneficiaries and the level of flexibility you need.
Start with the Big Picture
To decide which type of trust is best for you, consider your overarching estate planning goals. Do you want to support a loved one’s education? Leave money to a charity? Or perhaps you need to ensure a family member with special needs receives the assistance they need without compromising their Social Security benefits. Trusts can meet these needs and more. Here are a few of the most common types of trusts, and the pros and cons of each.
Types of TrustsLiving Trust
A living trust, or revocable trust, can be changed during your lifetime. You control the assets in the trust, and you can dissolve the trust at any time. You can be the trustee of your own living trust and appoint a successor trustee in the event of your incapacitation or death.
- Pros of a Living Trust
In most cases, you avoid probate. Probate can be lengthy, keeping assets tied up when your loved ones need support.
Succession planning. The rules for succession are specified so you can easily plan for worst-case scenarios.
- Cons of a Living Trust
Funding the trust is time-consuming. You’ll need to make sure you transfer all assets – including future assets – to the trust, or they remain subject to probate.
You’ll still need a will. Your will must account for any assets that didn’t pass into the trust. If you wrote your will before setting up your trust, you should revisit it with your trust in mind.
Charitable pass assets in a trust to a designated charity. Charitable trusts can be either revocable or irrevocable. A charitable remainder trust, for example, is irrevocable and pays you or another designated beneficiary an income for a pre-determined period. After that, the assets pass to a designated charity.
- Pros of a Charitable Remainder Trust
You can donate generously while receiving a tax break. Charitable trusts allow you to spread their income tax deduction over five years (subject to tax law changes).
You still receive income. You can ensure you or your beneficiary receives sufficient income while supporting a philanthropic cause.
- Cons of a Charitable Remainder Trust
You transfer control of the assets to the charity. This means the charity manages the investments.
Your contribution must be sizeable. You need to contribute enough to generate income, so this type of trust is best suited to large contributions.
Special Needs Trust
A special needs trust supports a beneficiary with a disability or special needs. This type of trust is designed to allow the beneficiary to still receive Social Security benefits, Medicaid and Supplemental Security Income. While a large cash gift would typically prevent someone from receiving Medicaid, a special needs trust allows the beneficiary to receive the funds they need while still receiving government-issued financial support.
- Pros of a Special Needs Trust
Overseen by a trustee. You choose a trustee to direct spending, ensuring reliable support for your loved one.
Does not interfere with government benefits. An appropriately set-up special needs trust allows your beneficiary to receive goods and services without endangering their Medicaid and other benefits.
- Cons of a Special Needs Trust
Proceeds cannot be given as cash. The trustee can spend assets on goods and services that help the beneficiary, such as paying for personal care assistance and out-of-pocket medical expenses.
An irrevocable trust cannot be amended or modified. Once it’s done, it’s essentially set in stone. However, this rigidity can be advantageous, especially for planning educational or long-term care expenses. An irrevocable education trust, for instance, can fund a beneficiary’s education while ensuring funds are only used for tuition and other educational expenses to prevent improper allocation or misuse.
An irrevocable trust can also help protect assets should you need long-term care. In such cases, you could transfer your assets into a trust, allowing a trustee to pay for expenses through the trust. This also prevents your assets from being subject to probate and estate taxes and keeps them separate from qualifying assets for Medicaid consideration.
- Pros of Irrevocable Trusts
Overseen by a trustee. You can appoint an independent trustee to ensure your assets are distributed the way you intended.
Protection from creditors. When you create an irrevocable trust, you transfer ownership of the assets in the trust. You no longer own the assets, so they usually can’t be seized by creditors.
- Cons of Irrevocable Trusts
Once it’s done, it’s done. These are fairly ironclad, so you need to be sure that this is the right move for you and your assets.
Your Trust Advisors
Given the complexity of trusts and estate planning, it is critical to work with advisors who are familiar with the types of trusts that will best suit your needs. An estate planning attorney and accountant are essential members of your team, as is the financial institution holding your trust.
For a knowledgeable team that provides unparalleled service through a reputable financial institution, consider consulting Arthur State Bank’s expert Trust Advisors. They will meet with you wherever you need assistance and coordinate with other members of your estate planning team to ensure your plans meet you and your beneficiaries’ needs. Contact your local trust advisor for an appointment to learn more about how we can help you optimize your funds for the future.