Understanding Different Types Of Trusts

When it comes to estate planning, trusts are some of the most beneficial tools that a person can choose to utilize. Trusts offer many benefits, such as protection of your privacy, protection of your assets, tax efficiency, smooth succession planning, and the avoidance of probate (which is a long and expensive court process). However, there are many different types of trusts one can choose to create, so it’s understandable to be a little overwhelmed by them all and unsure of which one is right for you and your family. In this blog, we’ll be going over how some of the various types of trusts work, as well as the advantages and drawbacks of establishing them. 

Revocable Trusts

Revocable trusts are also sometimes referred to as living trusts, and they essentially separate the ownership of your property from the control of your property in order to help facilitate the transfer of assets after your death, as well as ensure that they can be managed in the event that you become incapacitated. 

When you create the trust, you are named the “grantor,” and you also name a person who is in charge of managing the assets in the trust as the “trustee.” Many people choose to name themselves as their trustees, but it’s important to name a successor trustee, as well. That individual (or multiple individuals) will take charge of the trust after you die or if you become incapacitated. Finally, you will name beneficiaries who will benefit from the trust.

The main advantage of a revocable trust is that, well, it can be revoked, meaning you can change the terms or even cancel it entirely at any time you choose. They also tend to be simple to create, and of course, they bypass probate. 

Some disadvantages of a revocable trust are that the assets are not protected from creditors, they may not allow you to qualify for needs-based government programs like Medicaid, and they may still owe estate taxes in some cases. 

Irrevocable Trusts

Similarly, an irrevocable trust also separates the ownership of your property from the control of your property. However, you will likely have to name someone else as a trustee(s) besides yourself, and you will not be able to change anything about the trust unless a very limited amount of circumstances arise. It generally requires court permission and approval of all beneficiaries in order to modify or cancel the trust. 

Advantages of an irrevocable trust include stronger protection from creditors, possible eligibility for needs-based programs like Medicaid, and the ability to avoid probate while also avoiding estate taxes.

Disadvantages include giving up much more control of your financial affairs, the potential need to file additional tax returns (adding cost and complexity), and a greater difficulty to create than a revocable trust. 

Special Needs Trusts

Special needs trusts (SNT) allow a person to give financial assistance to a dependent with special needs while protecting their eligibility for government benefits such as SSI and Medicaid. They are intended to help a loved one with a disability live a more comfortable and pleasant life. The funds from the trust can be used to pay for many non-essential items, such as tuition, computer equipment, vehicles, travel, home decor, phone/internet services, and more. 

More benefits of SNTs include being tax-deductible and offering protection from creditors. Drawbacks include having high yearly management costs, as well as limitations to the beneficiary. Because the funds belong to the trust, beneficiaries are not able to pull them out at any time for whatever they wish; they must request funds from the trustee, who will determine whether the request is in-line with the purpose of the trust.

Family Trusts

Family trusts (which can be either revocable or irrevocable depending on the estate planning strategy) are any trusts used to pass on assets to one or multiple family members. They name the beneficiaries who will get the assets and how much, following the death of the grantor. Some types of family trusts are marital trusts, bypass trusts, and generation-skipping trusts. Depending on your unique goals, your estate planning attorney can guide you in the direction of the kind that most aligns with the reason you are creating the trusts. 

Family trusts are favorable for a number of reasons, including the protection of assets from creditors, judgements, and estate taxes, as well as the grantor’s ability to control when and how their wealth is distributed. 

On the other hand, family trusts can be costly and complex to create and maintain. They also result in loss of asset ownership and become subject to a high tax rate. 

Testamentary Trusts

Sometimes referred to as will trusts, these types of trusts are different from living trusts because they are established upon the death of an individual according to the terms laid out in their will. Some types of testamentary trusts include trusts for minor children, spousal trusts, credit shelter trusts, and irrevocable life insurance trusts. 

There are several reasons why one might want to create a testamentary trust, such as the ability to control how assets are distributed, protection for assets from creditors, the ability to provide financial support for minors, and the potential to be used to reduce estate taxes. 

However, it is important to realize that testamentary trusts, by name, call for the delayed distribution of assets since it can only occur after the death of the creator. Unlike many other trusts, assets in a testamentary trust are still subject to the probate process because they are established through a will. 

Dynasty Trusts

These trusts are often created by individuals with a high-net-worth, or who own a business, or who have simply accrued assets of substantially high value. They are irrevocable trusts designed to provide long-term protection and financial benefits to future generations, and work to keep assets within a family for as long as possible. There are many different types of dynasty trusts, including domestic and foreign dynasty trusts, grantor and non-grantor dynasty trusts, and perpetual and term dynasty trusts. An experienced estate planning attorney can review the type and value of your assets and recommend which kind of dynasty trust would be most profitable for your family. 

Dynasty trusts offer long-term asset protection, the structured preservation of family wealth, control over asset distribution, and they are not subject to estate tax, gift tax, or generation-skipping transfer tax. 

Nonetheless, the administration of these trusts can be highly complex, and will require careful management by a highly skilled trustee. They are more expensive to maintain than other types of trusts.

Call Villegas Law Firm Today To Learn More

Our lead attorney, Jorge Villegas, is seasoned in estate planning law and has helped hundreds of clients choose the right trust for their individual objectives. Call today to schedule your free initial consultation, where we can go over your options and answer any questions you have. We are dedicated to helping you make the most informed, empowered decisions when it comes to your hard-earned life’s wealth. Don’t wait, let’s get started today!