Introduction to Trusts
MisconceptionsIt’s no surprise that the wealthy utilize trusts, however they aren’t the only ones who can use them. Below we discuss who can use a trust and what type of trusts are out there. For more details please watch our webinar on Trusts and Asset Protection.
INTRO TO TRUSTS
Trusts are to believed to be only for the mega wealthy. Well we are here to tell you that is far from the truth. Trusts are for anyone who has any type of assets that are worth typically over $50,000 (think of your home.) A trust is a legal arrangement where one person or entity, the trustee, manages assets for the benefit of another person or entity, the beneficiary. The assets that are placed in a trust can include real estate, money, stocks, and other investments. Trusts are created for a variety of reasons, including estate planning, asset protection, tax planning, and charitable giving. In this article, we will explore the different types of trusts and how and why they are used.
1.) Revocable (Living) Trust
There are two main types of Trust Classes. 1. Public Trusts and 2. Private Trusts. A revocable trust, also known as a living trust which is tied to your Social Security Number, is a type of Public Trust that can be changed or revoked by the grantor during their lifetime. The grantor retains control over the assets placed in the trust and can modify the trust’s terms at any time. When the grantor passes away, the trust becomes irrevocable, and the trustee distributes the assets to the beneficiaries according to the trust’s terms.
Revocable trusts are commonly used in estate planning to avoid probate, a legal process that can be time-consuming and costly. By placing assets in a revocable trust, the assets can pass to the beneficiaries without going through probate. Additionally, revocable trusts do NOT provide any form of asset protection. This and a Will & Testament provide the basic type of estate plan you can have.
2. Irrevocable Trusts
Irrevocable trusts are trusts that cannot be changed or revoked by the grantor after they are created. Once the grantor places assets in an irrevocable trust, they no longer have control over the assets, and the trust becomes a separate legal entity. Irrevocable trusts can be used for a variety of purposes, including asset protection, tax planning, and charitable giving.
Asset protection trusts can shield assets from creditors, lawsuits, and other legal actions. By placing assets in an irrevocable trust, the assets are no longer owned by the grantor and are therefore protected from legal claims. Additionally, irrevocable trusts can be used for tax planning by removing assets from the grantor’s taxable estate. Charitable trusts, which we will discuss later, are also a type of irrevocable trust.
3.) Testamentary Trust
A testamentary trust is a type of trust that is created through a will and takes effect after the grantor’s death. The terms of the trust are specified in the grantor’s will, and the assets are transferred to the trust when the will is probated. Testamentary trusts are commonly used in estate planning to provide for minor children or beneficiaries with special needs.
Revocable trusts are commonly used in estate planning to avoid probate, a legal process that can be time-consuming and costly. By placing assets in a revocable trust, the assets can pass to the beneficiaries without going through probate. Additionally, revocable trusts do NOT provide any form of asset protection. This and a Will & Testament provide the basic type of estate plan you can have.
4.) Special Needs Trust
A special needs trust, also known as a supplemental needs trust, is a type of trust that is designed to provide for the needs of a beneficiary with disabilities. Special needs trusts are used to provide additional financial support to the beneficiary without affecting their eligibility for government benefits such as Medicaid and Supplemental Security Income (SSI).
The assets placed in a special needs trust are managed by a trustee who is responsible for using the funds to provide for the beneficiary’s needs. Special needs trusts can be revocable or irrevocable and can be funded with a variety of assets, including cash, securities, and real estate.
5.) Charitable Trusts
Charitable trusts are a type of irrevocable trust that is used for charitable giving. There are two main types of charitable trusts: charitable lead trusts and charitable remainder trusts.
Charitable lead trusts provide income to a charity for a specified period, after which the remaining assets are distributed to the grantor’s beneficiaries. Charitable remainder trusts provide income to the grantor or their beneficiaries for a specified period, after which the remaining assets are distributed to a charity.
Charitable trusts can be used for tax planning since the grantor can receive an
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