Trusts are essential tools in planning your estate. They are one part of a larger plan and can have many different benefits when used correctly. Trust may not be right for everyone, but for many people, trusts are an essential part of their estate plan. Understanding the different types of trusts will help you determine if you should include a trust as part of your estate plan.

What is a trust?

A trust is meant to survive the death of the trust maker and is used to hold certain types of assets for a business, individual, or group. A trust can be made after the trust maker’s death if the trust is established in the trust maker’s will. Assets placed into the trust are owned by the trust, not the trust maker or the person who puts the assets in the trust.

The person who manages the assets contained in the trust is known as the trustee. The assets held in the trust are subject to the rules and instructions of that trust. Even if the trust owns the assets, they are in the trust to benefit another person or business, or group of people. The person or business holding the title to the property is the trustee, and the person or business who benefits from the trust is known as the beneficiary. While there are many types of trusts to use in your estate plan, the two most common are irrevocable and revocable.

What is a revocable trust?

Trust created during the lifetime of the trust maker is known as a revocable trust. While the trust maker is still alive, the trust may be modified or even terminated. This type of trust is also known as a living trust. It allows someone to transfer the title of property into the trust. Property may also be removed from the trust well the trust maker is still alive. Using this type of trust is beneficial when trying to avoid having property go through the probate process. Because assets in the trust are owned by the trust, they avoid probate when the trust maker dies. Because probate can be avoided for some assets with the use of a revocable trust, they are a popular estate planning option; one thing that a revocable trust fails to do is protect your assets from creditors during your lifetime. Creditors make gain access to your property in the trust by petitioning the court. It is more difficult, but not impossible. Revocable trusts are usually converted into an irrevocable trust when the trust maker dies.

What is an irrevocable trust?

Irrevocable trusts differ from revocable trusts in that they are unable to be changed in any way after the creation of the trust. Once an asset has been placed into the trust, it cannot be removed, even by the trust maker. Other than this main difference, irrevocable trusts work the same way as a revocable trust.

What is an asset protection trust?

An asset protection trust is a trust designed to protect your assets from any claims that future creditors may have against you. This trust is more commonly found internationally than in the United States. Although it is more commonly found overseas, it does not always require that the assets are transferred to the jurisdiction that the trust is held.

These are usually created as irrevocable trusts for a set term, and the trust maker is not the current beneficiary to offer more asset protection. The trust is generally made so that the trust maker will get all of their assets back at the trust’s termination.

What is a charitable trust?

A charitable trust is one that is designed to benefit a specific charity. These trusts are commonly created as a way of lowering estate taxes. This is a powerful financial planning tool and one that will help others.

What is a constructive trust?

A constructive trust may also be known as an implied trust. A court creates these trusts based on a number of circumstances and facts available at the time of the court decision. This type of trust does not require a formal trust to be made before. Instead, the most common reason for creating a constructive trust is because of the intention of the property owner. Because the court makes it, you cannot be sure that the trust will be carried out in your intended manner.

What is a special needs trust?

A special needs trust is a type of trust reserved for someone who receives government benefits. The idea is that this trust will protect the beneficiary from disqualifying for government benefits if they were to receive an inheritance. This trust is legal and permitted under Social Security laws. It is only allowed if the beneficiary does not revoke the trust, and they do not change the frequency or amount of the distributions to them. This type of trust provides someone receiving government benefits to get an inheritance without losing their benefits.

Special needs entail a specific legal definition. It defines what the needs are to maintain the quality of life for a disabled person. Many things can be included in the definition of special needs. Some of these include medical or dental expenses, education, insurance, transportation, dietary needs, things to enhance their self-esteem, spending money, treatment for their condition, or rehabilitation if it is necessary.

What is a tax bypass trust?

A tax bypass trust allows an individual to leave money to their surviving spouse. It limits the amount of federal estate tax levied on the spouse when one spouse passes away. There is a limit to the amount of assets that can be passed to his spouse tax-free. After that limit, an estate tax must be paid.

What is a Totten trust?

A Totten trust is made well; the trust maker is still alive by depositing money into the trust makers account with instructions that upon their death, whatever is in that account will be given to a trustee. The money is not available to the trustee until the trust maker dies. This type of trust avoids probate and usually only holds securities and accounts with financial institutions. Unlike other types of trusts, a Totten trust cannot own real property. Using a Totten trust is a safer way to transfer assets than joint ownership making it a popular option for many.


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Trusts FAQs

When a loved one passes away, his or her estate often goes through a court managed process called probate or estate administration where the assets of the deceased are managed and distributed.  If your loved one owned his or her assets through a well drafted and properly funded Living Trust, it is likely that no court managed administration is necessary, though the successor trustee needs to administer the distribution of the deceased.  The length of time needed to complete the probate of an estate depends on the size and complexity of the estate and the local rules and schedule of the probate court.

Every probate estate is unique, but most involve the following steps:

  • Filing of a petition with the proper probate court.
  • Notice to heirs under the Will or to statutory heirs (if no Will exists).
  • Petition to appoint Executor (in the case of a Will) or Administrator for the estate.
  • Inventory and appraisal of estate assets by Executor/Administrator.
  • Payment of estate debt to rightful creditors.  Sale of estate assets.
  • Payment of estate taxes, if applicable.
  • Final distribution of assets to heirs.

A Living Trust can be used to hold legal title to your assets and provide a mechanism to manage them. You (and your spouse) are the trustee(s) and beneficiaries of your trust during your lifetime. You also designate successor trustees to carry out your instructions as you have provided in case of death or incapacity. Unlike a Will, a Trust becomes effective immediately. Your Living Trust is “revocable” which allows you to make changes and even to terminate it. One of the great benefits of a properly funded Living Trust is the fat that it will avoid probate and minimize the expenses and delays associated with the settlement of your estate. Read the FAQ section on Living Trusts for more information.

Like a Will, a Living Trust is a legal document that provides for the management and distribution of your assets after you pass away. However, a Living Trust has certain advantages when compared to a Will. A Living Trust allows for the immediate transfer of assets after death without court interference. It also allows for the management of your affairs in case of incapacity, without the need for a guardianship or conservatorship process. With a properly funded Living Trust, there is no need to undergo a potentially expensive and time consuming public probate process. In short, a well thought out estate plan using a Living Trust can provide your loved ones with the ability to administer your estate privately, with more flexibility and in an efficient and low cost manner.

Absolutely not! During your lifetime when you are mentally competent, you have complete control over all your assets. You may engage in any transaction as the trustee of your Trust that you could before you had a Living Trust. There are no changes in your income taxes. If you filed a 1040 before you had a trust, you continue to file a 1040 when you have a Living Trust. There are no new Tax Identification Numbers to obtain. The Living Trust can be modified at any time. Upon your incapacity, your successor trustee comes into effect and allows your loved ones to transact on your behalf according to the instructions you have laid out in the Living Trust. Upon your passing, the Trust becomes irrevocable so that no one can change your testamentary wishes. For married couples, the surviving spouse still has total control over his or her share of assets after its transfer to the survivor’s trust, and the trust becomes irrevocable only as to the deceased spouse’s share.

Assets with beneficiary designations such as a life insurance policy or annuity payable directly to a named beneficiary need not be transferred to your Living Trust. Furthermore, money from IRAs, Keoghs, 401(k) accounts and most other retirement accounts transfer automatically, outside probate, to the persons named as beneficiaries. Bank accounts that are set up as payable-on-death (POD for short) or an “in trust for” account (a “Totten Trust”) with a named beneficiary also pass to that beneficiary without having to be titled into your trust. However, when you do your estate planning, it is important to seek the counsel of an experienced attorney who is familiar with the intricate regulations of retirement accounts and can coordinate the appropriate beneficiary designations with your overall estate plan.

Federal law prohibits financial institutions from calling or accelerating your loan when you transfer property to your Living Trust as long as you continue to live in that home. The only exception to the federal law, enacted as part of the 1982 Garn-St. Germain Act is that it does not provide protection for residential real estate with more than five dwelling units. However, we find that most clients who do own residential real estate with more than five dwelling units tend to own them through a business entity and not directly in their individual names and hence are not concerned with the five dwelling exception.

A Pour-Over Will is used first to name a guardian for minor children. Second, it protects against intestacy in the event any assets have not been transferred into the trust at the death of the Trustmaker/Owner. It will also invalidate any previous Wills which you may have executed. Its function is to “pour” any assets left out of the trust into it so they are ultimately distributed according to the terms of the trust.