April 25, 2024

Different Types of Trusts

Are you looking for an effective estate planning tool that may help you avoid probate and reduce your overall tax burden? We can help! Call Hunter Sargent, PLLC, at (940) 594-7754 or reach out through our online contact form to explore your options.

Do you know what will happen to your loved ones after you pass away? If you’re the primary breadwinner in your family, you may feel concerned about their ability to earn money and maintain their standard of living. For many people, the desire to ensure their family’s financial stability is what eventually leads them to estate planning.

Although no one can predict when they will die, everyone can secure the peace of mind that comes with building a comprehensive estate plan. Rather than a one-size-fits-all approach, estate planning is a combination of strategies catered to an individual’s specific needs and goals. One of the most commonly used and powerful estate planning tools is called a trust.

Trusts come in various forms, and not all of them are appropriate for every situation. Luckily, you don’t have to navigate your options alone — our experienced estate planning attorneys are here to help. This article will explore different types of trusts, how they work, and how an estate planning lawyer can help you secure the peace of mind you deserve.

What Is a Trust?

trust is an estate planning tool that allows you to set aside specific assets such as money, stocks, or property for your loved ones to access after you’ve passed away or can no longer provide for them. This is typically accomplished with the help of a trustee, a person who helps distribute assets to your chosen beneficiaries when the time comes. 

A trust is an important document and has little room for error. Even small mistakes can render a trust challengeable, which is why most people benefit from hiring an estate planning lawyer to draft, notarize, and make changes to their trust.

Benefits of Trusts

Trusts offer many potential advantages to their users, including flexibility and efficiency. Here are some of how trusts can help streamline your estate planning process:

  • Asset protection. Trusts can shield assets from creditors and lawsuits, depending on the type of trust and the jurisdiction in which it’s created. This protection can ensure that assets are preserved for the beneficiaries.
  • Probate avoidance. Assets held in a trust typically avoid the probate process, which can be a time-consuming and expensive endeavor. By bypassing probate, assets are distributed to beneficiaries more quickly and privately.
  • Privacy. Whereas wills become public record during probate, trusts are private arrangements. This means that details about the trust’s assets, beneficiaries, and distributions remain confidential.
  • Control. Trusts allow the trustor to specify how and when assets are distributed to their beneficiaries. This control can be especially useful for beneficiaries who may not be ready to manage their inheritance or in situations where assets need to be distributed over time.
  • Tax planning. Certain types of trusts, such as irrevocable life insurance trusts (ILITs) and charitable trusts, can offer tax advantages by reducing estate taxes, gift taxes, or income taxes. Trusts can also help minimize the impact of taxes on beneficiaries.

Ultimately, trusts are a versatile estate planning tool that offers many potential benefits to all involved parties. Accessing those advantages, however, depends on choosing the right type of trust for your specific circumstances.

Common Types of Trusts

As previously mentioned, there are many different types of trusts to choose from. Each type of trust offers a range of potential pros and cons. This section will describe some of the most popular types of trusts and explore their functions.

Revocable Living Trust

A revocable living trust is one of the most common types of trusts. These types of trusts allow the grantor (the person creating and funding the trust) to set aside specific assets while they’re still alive. Upon the grantor’s death or incapacitation, an appointed trustee distributes the grantor’s assets to their beneficiaries.

There are two main benefits to establishing a revocable living trust. The first is that they’re typically exempt from the probate process, meaning beneficiaries can receive their inheritances in a timely and efficient manner. The second benefit is flexibility. While some types of trusts cannot be revised once they’re signed, a revocable living trust can be changed by the grantor at any point during their life.

Lastly, a revocable living trust is private, allowing beneficiaries to receive their inheritance behind closed doors. This not only protects the privacy of your beneficiaries, but it also allows for more security in situations where a beneficiary receives valuable objects such as jewelry, antiques, or precious metals.

Irrevocable Living Trust

An irrevocable living trust is similar to a revocable living trust, but with a critical difference: Once established, an irrevocable trust cannot be revised or revoked.

Although irrevocable trusts are more rigid than revocable trusts, they offer several notable advantages. Specifically, irrevocable trusts can help minimize estate taxes, retain access to government benefits, and offer robust protections for certain assets — in addition to providing all of the benefits of revocable trusts.

While there are many benefits to an irrevocable trust, it’s important to recognize its permanence. As with all estate planning, double-check all of the fine details associated with your trust. This is especially important with an irrevocable trust which cannot be changed once it is signed.

Special Needs Trust

While not as common as a revocable or irrevocable trust, a special needs trust is a great solution for families who have a child or other dependents with special needs. Upon your death or incapacitation, your family member, dependent, or friend with special needs may struggle to provide for themselves due to their disability. While Medicaid or other government assistance programs may help mitigate these costs, they might not be enough for the level of care that they need.

By creating a special needs trust, the grantor sets aside financial assistance from their estate to be put toward the care of their loved one. This not only ensures that not their basic needs are provided but also that they receive the level of care they deserve. Another key benefit is that special needs trusts do not jeopardize a beneficiary’s eligibility to receive government assistance, meaning they can still collect critical benefits.

Charitable Trust

For some grantors, leaving a portion of their assets to a good cause is an important part of their estate plan. These individuals can achieve their goals by establishing and funding charitable trusts to be distributed for a specific charitable purpose. Regardless of the specific cause or beneficiary, the appointed trustee has a legal obligation to manage its funds according to the wishes of the grantor. This means that upon the grantor’s death or incapacity, the trustee must allocate the correct funds to the correct organizations.

Testamentary Trust

testamentary trust is a legal arrangement set up in a person’s will that comes into effect upon their death. It allows the deceased’s assets to be managed by a trustee for the benefit of one or more beneficiaries, often over a specified period or according to certain conditions outlined in the will. These trusts can be useful for various reasons, such as providing ongoing financial support to minors, ensuring responsible management of assets, or minimizing estate taxes.

Asset Protection Trust

An asset protection trust is a legal arrangement where the grantor transfers assets into a trust, typically to protect them from creditors or legal claims. Like other types of trusts, an asset protection trust is managed by a trustee who oversees the assets on behalf of the beneficiaries.

The primary goal of an asset protection trust is to shield assets from potential risks such as lawsuits, bankruptcy, or divorce settlements. By placing assets into the trust, the grantor relinquishes direct ownership, making it more difficult for creditors to access those assets if a legal judgment is made against the grantor.

At first glance, an asset protection trust may seem nefarious, but the reality is that there are many legitimate reasons why a grantor may try and protect their beneficiaries from creditors and insurance companies.

For example, suppose Sue dies of cancer leaving behind hundreds of thousands of dollars in medical debt. She has a life insurance policy and a trust set up for her children, but because Medicaid is owed money for her medical debt, her children see none of the money granted to them by her estate. If Sue had set up an asset protection trust, her children would have access to the inheritance that Sue intended for them to have.

Spendthrift Trust

A spendthrift trust is a legal arrangement used to protect assets for the benefit of a beneficiary who may not be able to manage their finances responsibly. With this type of trust, the trustee must distribute funds to the beneficiary according to the terms outlined in the trust document, which includes restrictions on the beneficiary’s ability to access the funds directly.

Spendthrift trusts are used for various purposes, and the terms of the trust can be customized to fit the needs and circumstances of the beneficiary and the goals of the grantor. They are often established as a way to leave an inheritance to beneficiaries who would not benefit from receiving a lump sum of money or could not be trusted to spend it wisely.

They can also help shield the assets from the beneficiary’s creditors. Since the beneficiary does not have direct control over the funds, creditors cannot access the assets to satisfy the beneficiary’s debts. This can be useful in situations where the beneficiary has a history of financial irresponsibility or is at risk of being targeted by creditors.

How Do I Set Up a Trust?

The above-described trusts do not represent an exhaustive list. There are many different types of trusts not listed here that our estate planning law firm can help you explore. To establish your trust, you will need to complete the following steps:

  • Identify your goals. Determine why you want to set up a trust, specific goals, and limitations. Common reasons include asset protection, tax planning, providing for loved ones, or charitable giving.
  • Choose a trustee. The trustee is responsible for managing the trust assets and following the instructions outlined in the trust document. You can choose yourself, a family member, a friend, or a professional trustee (like a bank or trust company). The most important thing is to appoint a trustworthy, responsible trustee.
  • Select beneficiaries. Your beneficiaries are the individuals or organizations that will receive assets from the trust. They can include family members, friends, charities, or even pets.
  • Select the right type of trust. The right trust for you will depend on your specific goals, financial circumstances, and the types of assets you wish to use. Even if you have a rough idea of which trust you want to choose, it’s a good idea to discuss your choice with a legal professional before committing to it.

After you’ve decided on how to handle these tasks, an estate planning lawyer can help you put it on paper. An experienced lawyer can help draft, review, file, and update your estate plan to ensure you receive the maximum benefits.

Speak with a Denton Estate Planning Attorney

The final and most important step before making any estate planning decisions is scheduling a consultation with an estate planning attorney.

In addition to creating a comprehensive estate planning strategy, a dedicated attorney from Hunter Sargent, PLLC, can conduct periodic updates and anticipate issues before they arise. Our attorneys will apply their insight and experience to generate the best possible outcome for you, your beneficiaries, and your estate.
Ready to secure your legacy and safeguard your family’s future? Call Hunter Sargent, PLLC at (940) 594-7754 or schedule a consultation online to speak with a passionate estate planning professional today.

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