It may seem that trusts only belong to wealthy people, but they are common and useful tools for estate planning of all sizes. They are used to manage and protect assets, control the distribution to beneficiaries, and continue family legacies. There are different types of trusts.
Types of Trusts
There are many types of trusts, but they all establish a financial arrangement between three parties: the settlor(s), the trustee(s), and the beneficiary(ies). The person creating the trust is known as the settlor. (In other states, the creator of the trust can be referred to as the trustor, grantor, or trustmaker.) Trusts can be created by more than one person or entity. The trustee manages the trust and disperses income or principal from the trust according to specific terms. The trust is for the benefit of one or more beneficiaries, which can be people or entities, such as charities.
Benefits of Trusts
Trusts provide many benefits. One of the key benefits is transferring assets from the owner to the trust fund, so assets do not have to go through a probate court before reaching the beneficiary. This allows the beneficiary to receive the assets faster and generally privately. Probate proceedings can last for months, unnecessarily delaying the dispersal of assets. Since court records can be viewed by the public, in many circumstances assets become public knowledge.
A person can establish a trust that they benefit from during their lifetime. Trusts can also be used to hold and disperse assets to beneficiaries who are minors, disabled, or otherwise unable to manage the assets. Some trusts are used to remove countable assets from a person who is planning to apply for Medicaid benefits. Assets intended for heirs may prevent them from qualifying for Medicaid coverage. Trusts created for this purpose are usually established at least five years before the settlor plans to apply for Medicaid.
Since estate taxes and gift taxes can eat into the number of assets a beneficiary receives, trusts provide a way to avoid or lessen these taxes. Trusts can protect assets from creditors, legal claims, and family disputes regarding how your assets should be dispersed. You may have additional reasons to create a trust for your assets.
Types of Trusts
There are two types of trusts: living and testamentary. Trusts may be revocable or irrevocable. They can be funded during or after the settlor’s life, depending on the purpose of the trust. These common trusts are described as follows:
A living trust or inter vivos trust is set up while the settlor is still alive. The assets that are held in the living trust are typically available to the settlor during his or her lifetime. This type of trust is helpful if the settlor wants to have access to the assets but wants to give clear direction on how they will be distributed after death.
A testamentary trust is a trust that is contained within an individual’s last will and testament. It is generally set up to benefit the settlor’ descendants. It goes into effect when the will is probated by a probate court judge.
A revocable trust is created while the settlor is still alive and wishes to continue to benefit from the assets that the trust will hold. Often the settlor, trustee, and beneficiary are the same person while that person is still alive. After the settlor dies, a successor trustee assumes management of the trust for the benefit of the beneficiaries designated in the trust. The settlor can change or terminate a revocable trust while her or she is still alive.
An irrevocable trust cannot be changed or terminated during the settlor’s lifetime. Because the assets held in an irrevocable trust are off limits to the settlor, this type of trust helps protect assets from creditors and taxes. It is often used when planning for Medicaid or government benefits. It may also be used to limit access to minors and adults with special needs to distribute funds at specific times or over their lifespan.
Trusts help individuals and businesses protect and direct their assets to beneficiaries while keeping those assets out of probate court. An experienced estate planning attorney can help you create the trust, or trusts, that will best suit your family’s needs and financial goals.
This article offers a summary of aspects of estate planning law. It is not legal advice, and it does not create an attorney-client relationship. For legal advice, Contact our Ruston, LA office by calling us at (318) 255-1760.