When considering their life and estate plan, most individuals understand the need for a will and basic powers of attorney for personal, financial and health care matters. However, the need for and benefit of a trust can be a little more confusing. Gaining a basic understanding of a trust and its potential benefits is important for individuals and families of all wealth and income levels, allowing for sound decision making and proper estate planning. While the specifics of your life and family situation are best addressed in a more personalized discussion, this brief overview will provide some basic understanding of trusts and help you make more educated decisions for your future.
A trust is created when property of some sort (an account, a home, some personal property, any property) is transferred to an individual "in trust" for the benefit of some other individual, group of individuals or organization. A trust can hold title to very little property or millions of dollars of property. Trusts can be established during your life, at your death or after your death. Trusts can be established to benefit you, your family, your descendants, a social or religious organization or any myriad of individuals, companies or organizations. Put simply, a trust is a vehicle by which one person holds property for the benefit of another person and typically includes detailed specifications on how, when or for whom that property is to be used.
A Revocable Living Trust - usually just called a living trust - is the most common type of trust created. It is created by you, during your life and can typically be changed, amended or terminated at any time before your death. The trust is formally created by a "Trust Agreement" or "Trust Declaration." After creating the trust, you would usually transfer all of your assets and property into the trust. You typically serve as both the "trustee" managing the assets, as well as the "beneficiary" for the benefit of whom the assets are being held or managed. Accordingly, day-to-day management and ownership of property transferred to your trust during your lifetime is not much different than normal non-trust ownership.
There are five key benefits to creating a Revocable Living Trust:
For more detail, see our article on Living Trusts.
While a Revocable Living Trust is surely the most common type of trust and makes the most sense for the highest number of people, there are several other types of trusts that may be useful or beneficial. Depending on individual circumstances and family and financial goals, the following types of trusts may be considered:
A Testamentary Trust is a trust created in a manner so as to come into existence only at the time of your death. The terms of a testamentary trust would typically be included in a will and the trust never exists while you are living. Testamentary trusts can also be an additional extension of part of an already-existing revocable living trust.
A Testamentary Trust is often advisable if you are in any of the following circumstances:
To read more, please see What is a Testamentary Trust?
An "A-B" Marital Deduction Trust is created to minimize gift and estate taxes for married couples. This type of trust is typically an extension of the standard revocable living trust. A Marital Deduction Trust can be created as one trust for two married individuals or can be the combination of two separate trusts—one for each spouse. This type of trust maximizes certain estate tax deductions for married couples.
You should consider a Marital Deduction Trust if you are married and have significant assets.
A Discretionary Special Needs Trust is a trust created for the benefit of an individual who is receiving state or federal government benefits, or who may be eligible to do so in the future. Property can be held and used for such individual’s benefit while not negatively affecting their eligibility for government benefits.
For more information, see How a Special Needs Trust Works.
An Irrevocable Trust for a Minor is a trust funded for a minor in a manner that qualifies the donor for the annual gift tax exclusion. The trust/gift cannot be revoked and must meet several IRS guidelines. The key benefit of this type of trust is to allow for continued control over the gift by the donor (as opposed to an outright gift), while ensuring that the gift still qualifies for annual gift tax exclusion.
For more information, see Trusts for Children.
A Revocable Life Insurance Trust is a trust that is created to be the owner of a life insurance policy and the beneficiary of the policy’s eventual insurance proceeds. The trust can be revoked at any time. The primary benefits of this type of trust are (i) allowing for control/supervision of life insurance proceeds, (ii) allowing for divided distribution of life insurance proceeds among multiple recipients, (iii) avoiding probate, and (iv) remaining flexible and revocable.
An Irrevocable Life Insurance Trust is a trust established to be the owner of a life insurance policy and the beneficiary of the policy’s eventual insurance proceeds. This type of trust cannot be revoked and the creator of the trust cannot serve as the trustee of the trust. The major advantages are similar to a Revocable Life Insurance Trust, except this type of trust is less flexible, instead providing avoidance of estate taxation on the life insurance proceeds.
To learn more, see What Does an Irrevocable Life Insurance Trust Do?
To learn more about trusts and trust administration, see AllLaw's section on Trusts.