People often misunderstand trusts, thinking that they are exclusively for multi-millionaires and their children. While a trust can certainly help someone in that financial situation, trusts can also be helpful in a multitude of other situations.
Very simply, a trust is an entity that holds or owns property and distributes that property in accordance with its governing document, called a “Trust Instrument,” for the benefit of others who are called the “Beneficiaries.” The person who creates a trust is called the “Grantor”. The person responsible for managing the trust is called the “Trustee.” There are “Primary Beneficiaries” and “Secondary Beneficiaries.” Secondary Beneficiaries receive distributions from the trust only after a Primary Beneficiary dies or some other event occurs.
What are the most common reasons for a trust?
The two most common reasons for establishing a trust are reducing taxes and achieving a desired level of control over when and how property or assets are passed to the beneficiaries. There are many types of trusts. Some trusts go into effect only at the death of the Grantor but others sooner.
What are some common types of trusts?
Trusts can be “testamentary” (included in the Grantor’s will) or “non-testamentary” (described in a trust instrument entirely apart from the Grantor’s will). Trusts can be “revocable” (able to be revoked by the Grantor at any time) or “irrevocable.” Following are descriptions of several general categories of trusts, all of which can be tweaked in many and various ways to meet the goals of the Grantor.
Marital Trusts. A marital trust benefits the Grantor’s spouse. The trust can end or “terminate” when the spouse dies, or it can continue for the benefit of the Grantor’s children or other beneficiaries.Several years ago, marital trusts were commonly used to enable wealthy couples to take advantage of certain estate tax exemptions. Marital trusts can still do that, but much more often now marital trusts are used by Grantors with children from a prior marriage who want to support their current spouse after their death but ensure that what remains of their property after their spouse’s death will go to their children or grandchildren. The benefits a spouse receives from a marital trust can be defined in an infinite number ways by the trust instrument. The Grantor may give the Trustee freedom to distribute any amount to the spouse at any time, or the Grantor may place restrictions on the Trustee to distribute only the interest earned by the assets of the trust or at particular times in the spouse’s life.
Trusts for Children and Grandchildren. Many people would like to leave assets for the support or education of their children or grandchildren. However, leaving assets directly to a child means that a guardian for the child would control the assets until the child reaches age eighteen. The child would then have full control. This prospect is not very appealing to many Grantors. Such Grantors want to create a trust and name a trustee they know they can trust to manage the assets and use them only as directed by the trust instrument for the benefit of the child or grandchild. They also want the trust to terminate when the beneficiary is older – twenty-eight or thirty years old, for example – when the beneficiary can probably handle their inheritance responsibly. Although many trusts for children and grandchild terminate when the beneficiary reaches a certain age, Grantors who are concerned about a beneficiary’s financial irresponsibility may want their trust to continue for the lifetime of the beneficiary and severely limit the beneficiary’s access to the trust property. These are “Spendthrift Trusts.” Some trusts require the beneficiary to meet certain standards of behavior or reach certain goals before assets can be distributed to them. These are called “Incentive Trusts.”
Special Needs Trusts. Special needs trusts enable a person to leave property to an individual with special needs without disqualifying them from receiving government assistance. If such an individual were to suddenly inherit money, they would be disqualified until the inheritance was spent. Special needs trusts help the beneficiary by allowing them to continue receiving assistance and use trust assets for other expenses. Examples of these expenses include entertainment, vacations and transportation expenses that will enrich or improve the individual’s quality of life.
Pet Trusts. Owning a pet comes with a good deal of expense for veterinary appointments, medicines, food, toys and other items necessary for a happy, healthy pet. Pet owners often include a trust in their will to provide financial assistance to the caretaker who will receive their pets after their death. The trust can give a one-time lump sum to the caretaker to be spent at their discretion on the pets’ needs, or the caretaker can receive smaller amounts from the Trustee over time.
What kind of trust is right for me?
There are many things for a Grantor to consider when creating and funding a trust. The needs and characteristics of the beneficiaries are only two factors to consider. Other factors include the type and amount of assets to be put in the trust, and the Grantor’s overall estate planning goals. There are many types of trusts and many reasons for using a trust. If you are considering whether a trust is right for your situation, it is best to consult an attorney experienced in estate planning. Your attorney should listen to your concerns and goals and draft a trust that is right for you. At Rhodes Law Firm, PLLC, every estate planning document we create is tailored to our client. We would be glad to assist you with creating your estate plan.
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