Different Trusts Meet Different Needs in Your Estate Plan
There are a number of different types of trusts we may use when doing an estate plan. Here is a bit about a few or the most common.
The Revocable Living Trust
The primary trust we use in estate planning is the Revocable Living Trust (“RLT”). It is the foundation of most plans and offers many benefits. Not only does it contain instructions for managing the assets in the trust if you become incapacitated, but it will also avoid the need for a probate court proceeding on your death. The person(s) you select will be able to step in quickly to gather, sell and distribute your assets to your beneficiaries with no need for a court’s involvement.
When we create an irrevocable trust, we intend that we will not change or revoke the trust. Once we put it in place, the circumstances permitting a change to the trust are limited. An irrevocable
trust has some specific uses, most of them involve transferring property out of your hands and out of your control – meaning someone else will serve as the trustee of the irrevocable trust.
There are four primary uses for irrevocable trusts: estate tax planning, providing for a spouse in a second (or third) marriage where there are children from the previous marriage, asset protection and providing for special needs beneficiaries.
When the estate tax exemption was very low, many people set up an irrevocable trust to avoid estate taxes or provide money to pay the taxes. Estate taxes – or inheritance or death taxes as they are sometimes called – are calculated based on what you own – what is in your estate – at your death. In order to avoid estate taxes, you might create a trust and transfer some of that property out of your estate and into the estate of someone (your children, for instance) whose estate is smaller and who will not pay an estate tax.
An irrevocable trust can also be created upon your death to benefit a spouse in a blended family situation. This irrevocable trust can be used to care for your spouse as a beneficiary during his or her lifetime, while assuring that at his or her death your children receive the property in the trust.
Asset protection trusts are another common trust, designed to avoid creditors and protect assets. Your RLT does not provide asset protection. This asset protection trust needs careful and considered planning. It must be created in advance of any trouble on the horizon. If you already have a claim coming down the pike, it is too late to start asset protection planning.
An irrevocable trust can also be established for someone who is receiving government benefits such as Medicaid. A Medicaid Asset Protection Trust can also be set up to protect assets and qualify for Medicaid long term care services.
Trust Planning for Retirement Assets
A Standalone Retirement Trust (“SRT”) can make sense for Retirement assets. For a person who is in a second marriage, with children from a previous marriage or relationship, giving your spouse the money outright means that the spouse will be able to name a new beneficiary and is under no obligation to follow your wishes or leave anything to your children.
The SRT is a great solution to this problem. The trust allows one spouse to leave an IRA to the second spouse in trust and assure that whatever is left after the second spouse’s death goes to the beneficiaries the first spouse designates.
Another use for this trust is to assure that someone else is managing funds for minor children and making distributions as appropriate and necessary for their care and education. It also assures
that a child who’s turned 18, isn’t able to take a big distribution or even cash out the entire account and blow the funds. Instead, your responsible adult trustee determines the best use of the money and makes sure there are funds for the things you would want your children to have money for.
Pet trusts are not just for the wealthy. It is true that the rich and eccentric get attention for the lavish gifts they bestow on their spoiled pets. However, your own neighbors may want or need a pet trust. Why? Because some pets can live a long, long time, longer even than we live. Tortoises are one example. Another are horses – which are also expensive to keep. Setting up a Pet Trust assures the money is there to continue their proper care and assure they live out their natural life the way you would want. Pet trusts allow a pet owner to provide not just money for the animal, but detailed requirements for their care.
I would be happy to assist you with any of these types of trusts. Call our office at 602-375-6752 to make an appointment for our free initial consultation and review of your situation.