Trusts come in many different forms and serve multiple different purposes. Whether a Trust should be included in your estate plan is something you should discuss with your attorney. To aid you in your discussion, here is a primer on the most common types of trusts used in estate planning.
What is a Revocable Trust?
A revocable trust holds property for you during your lifetime. You can revoke the trust and take back ownership of the property at any time that you choose. Revocable trusts are sometimes used in the place of Wills in order to avoid the probate process. If avoiding the probate of a Will is your goal, you should take care to ensure that all of your property is held by your revocable trust or is otherwise held in a non-probate form, i.e. as joint property with a spouse.
What is an Irrevocable Trust?
An irrevocable trust cannot be revoked by the creator, and is often used in asset preservation planning to assist the creator in later qualifying for Medicaid. Anything transferred into a properly drafted irrevocable trust more than five years before a Medicaid application is filed will not be counted as an asset of the Medicaid applicant.
What is a Supplemental Needs Trust?
A supplemental needs trust can be set up for the benefit of a disabled person by a third party. For example, a father may set one up for his disabled child in his Will, so that money will be available for the child’s care after the father’s death. A supplemental needs trust does not affect the eligibility of the disabled child for governmental benefits, such as SSI or Medicaid. One of the advantages of a third party supplemental needs trust is that the principal of the trust can be left to other family members after the death of the disabled person.
What is a Special Needs Trust?
A special needs trust is similar to a third party supplemental needs trust in that it does not affect the eligibility of a disabled beneficiary for governmental benefits. In contrast to a third party supplemental needs trust, a special needs trust is set up with the disabled person’s own funds – sometimes from the proceeds of a personal injury settlement. In addition, funds left in the trust after the disabled person’s death must be used to pay off any lien Medicaid has for providing medical care during the disabled person’s lifetime.
What is an Irrevocable Life Insurance Trust?
An Irrevocable Life Insurance Trust (ILIT) is often used to assist with the payment of potential estate taxes. When the ILIT is established, the creator gifts money to the Trust to purchase a life insurance policy on his or her life. Over the course of the creator’s life, he or she gifts additional money to the ILIT to pay annual premiums, keeping the annual gifts below the annual exclusion amount for federal gift tax purposes. This allows the value of the insurance policy to grow outside of the taxable estate of the creator. Upon the creator’s death, the death benefit paid under the life insurance policy is not part of the creator’s taxable estate and is therefore available to help pay any estate taxes that are levied on the creator’s estate.
In addition to the trusts mentioned above, trusts may be used by estate planning attorneys for a variety of other reasons. Quite commonly, trusts are used in Wills to control the distribution of money to children. For example, you can set up a trust in your Will to hold money for your child until they reach the age of 30, while allowing your Trustee to distribute funds to your child for purposes that are worthwhile, i.e. for education or the purchase of a new home. This control of funds on a child’s behalf can help prevent money from potentially being dissipated on less worthy “needs” like sports cars or luxury vacations.
Whether a trust should be part of your estate plan is a discussion you should have with your attorney. As you can see, trusts come in a great variety of types and serve many purposes. An experienced professional can help you make the right decisions based on your personal circumstances.