There are many types of trusts, each of which serves different purposes. Even within the various types of trusts can be different language and clauses that can further achieve your goals. Some of the most common trusts include:
• Revocable Trust. Revocable trusts (also known as living trusts) are created during the lifetime of an individual and can be changed at any time. Revocable trusts are foundational for many clients whose goal is to avoid probate and make things easier for their families.
• Irrevocable Trust. The irrevocable trust cannot be changed. Irrevocable Trusts are used for Medicaid planning, educational planning for children or grandchildren, or as a way to set-up a legacy for their families for years to come. Also, when a person who creates a Revocable Trust (or Living Trust) dies, that once changeable trust now becomes an Irrevocable, since the power to amend (or change) the trust is solely in the trust creator (or grantor). Understanding the benefits, as well as the risks, with utilizing an irrevocable trust in your estate planning is critical.
• Asset Protection Trust. Asset protection trusts are designed to shield a person’s assets from claims of future creditors. These trusts can be structured to be irrevocable for a specific term, after which time, undistributed assets can be returned to the trust creator.
• Charitable Trust. This is a type of irrevocable trust that allows a person to make a gift to a charity or other non-profit organization without the asset being subject to capital gains tax or income tax during the person’s lifetime or the lifetime of their beneficiaries. Charitable Trusts can be set up in a variety of way to achieve the donor’s philanthropic intent. The most common forms are a Charitable Remainder Trust (CRT or CRUT) or a Charitable Lead Trust (CLT).
• Special Needs Trust. Many government benefits, such as Medicaid, have asset limits. This means that if a special needs individual has assets above that limit, that individual may lose their government benefits. With a special needs trust, also known as a supplemental needs trust, parents will no longer worry that the inheritance they leave them will cost their special child their much-needed benefits. Since the assets in the special needs trust are not owned by the special needs individual, they are not included in the government’s asset limits tests. Special needs provisions are an essential part of estate plans for families with loved ones with special needs.
• Spendthrift Trust. Spendthrift trusts, and spendthrift provisions, are a way to protect the trust beneficiaries from creditors (e.g. lawsuits, bankruptcy), and often times from themselves (poor financial judgement). Depending on when a person inherits from an estate, they may not have the legal capacity (e.g. under age of 18) or maturity to not spend large sums of money. A spendthrift trust allows the beneficiary(ies) to receive payments from the trust at such times or in such manner as may be specified in the trust document. The beneficiary is not permitted to use the Trust assets as collateral for a loan, and if the beneficiary has creditor issues, that creditor cannot, in a majority of instances, reach into the trust to satisfy that debt.
• Estate Tax Bypass Trust. With an estate tax bypass trust, spouses can transfer money to the other partner while limiting the amount of federal estate tax that is typically due upon death. This type of trust is commonly known as an AB trust, and is used with married couples to ensure that each person utilizes the applicable tax exemption amount when he or she dies. Simply put, the AB trust doubles the amount of estate tax free money that can be passed to your families.
Determining which type of trust may be right for your particular situation can be challenging. As a New Albany trust lawyer, I can listen to your estate planning objectives and provide expert guidance on whether a trust, and which trust, may be most advantageous to your situation.