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What Are the Different Types of Trusts Used in Estate Planning?
Planning for one’s death is never a fun topic to dwell on, but it is a necessary and also a wise thing to do. No one can know when they are going to die. That is why a reasonable person should put together a plan, in writing, as to how they wish their property to be distributed after you die. If you do not do this, then your property may be given to people that you would never agree to when living. At this point, you could not do anything about it because you are dead.
Most people think that estate planning is only for the wealthy, but that is no longer the case. Even if you live a relatively middle-class life, you still may own things that you want to go to specific people, but without writing up a will and doing some form of estate planning, state law will dictate who gets your stuff. Without estate planning, if you die, a relative you want nothing to do with may get your stuff under certain circumstances. Depending upon what type of property you own and how much, you should not only have a will, but you should consider using trusts as part of your estate planning.
When a trust is created, there are certain rules that control the trust and its actions. Once property is transferred to the trust, then the trust owns the property, and no one else. The property has to be dealt with pursuant to the rules of the trust. The beneficiary is someone who benefits from the trust, but does not own the property. The trustee is a person or entity that controls the trust and makes sure the rules are followed. However, the trustee does not even own the property. The trust does.
There are many financial reasons why someone would use trusts in their estate planning and give up ownership rights to their property to a trust. There are significant tax savings that can happen as well as liability protections. Here are some of the more common trusts used in estate planning and the reasons behind their use:
Revocable Trusts
A revocable trust is more commonly referred to as a “living trust,” because it is established during the lifetime of the trust creator. During the trust creator’s lifetime, the trust can be changed or modified, or even revoked and disbanded altogether. So, why would you want a revocable trust that can be created or revoked at any time? One of the major benefits of a revocable trust is that when property is transferred to the trust, and the trust maker dies, then that property is not part of the decedent’s estate and not subject to probate.
The downside of a revocable trust is that it does not provide asset protection to the trust maker. If the subject property is owned by a revocable trust, and the trust creator dies, the creator’s creditors can still get access to the property to pay for the debt.
Irrevocable Trust
An irrevocable trust cannot be changed or revoked after it is created. Once property is transferred to the trust, then the trust owns that property for good. This, obviously, provides for probate protection similar to a revocable trust. However, it also provides excellent asset protection against any creditors after the trust creator dies. In many instances, a revocable trust will be crafted in a way that it automatically becomes an irrevocable trust once the trust maker dies so that whatever property is contained in the trust is protected from creditors.
Asset Protection Trust
The sole purpose of an asset protection trust is to protect the assets of the trust creator. When an asset protection trust is established and the property transferred into it, then it is usually done so in another country, outside of the jurisdiction of where the trust maker lives. This is also an extra protection level. The trust is usually set up as an irrevocable trust for a set number of years which is also another level of protection. Once the set number of years is up, then the property can be transferred out of the trust and into the trust maker’s hands.
Charitable Trust
A charitable trust is one that is created that has the ultimate goal of helping support a charity or the general public in some manner. The idea is that a trust is established and property is transferred into the trust. The trust creator usually has access and receives benefits from the trust owned property during their lifetime. However, upon death, the trust is transferred to the charity chosen by the trust creator. This also helps in lowering estate and gift taxes upon the trust maker’s death.
Special Needs Trust
A special needs trust is created for a beneficiary that, for many reasons, is receiving government benefits and cannot have ownership of a lot of assets or money. For example, there is a family that has a mentally challenged adult son who receives government assistance due to his mental challenges. If property or assets were given to him, then he’d earn too much money and those benefits would stop. So, his parents set up a special needs trust so that, upon their death, property from their estate goes into the trust and their son is the beneficiary. The son is allowed to use income from the trust for many things that would make his life more comfortable, all without jeopardizing the government benefits.
The Warren Wills Trusts and Estate Lawyers at Herold Law, P.A. Have Been Helping Families with Estate Planning for Decades
When it comes time for you to think about estate planning, contact our experienced Warren wills, trusts, and estate lawyers at Herold Law, P.A. Call us at 908-647-1022 or complete our online form to schedule an initial consultation. Located in Warren, New Jersey, we serve clients throughout the surrounding areas, including Plainfield.
