Estate planning involves finding unique ways to protect your assets and provide for your loved ones. One way to do that is by using a trust. In this blog, we define what a trust is, explain the different types available, and discuss how you may benefit from including a trust in your estate plan.
What Is a Trust?
A trust is a legal entity that allows a third party (the trustee) to manage the trust assets for the benefit of someone else (the beneficiary). Trusts are created by executing a legal contract that includes instructions on how the trust is to operate, who the beneficiaries are, and the purpose of the trust. There are certain requirements for trusts depending on the type. Thus, it’s imperative that you work with an experienced estate plan lawyer when setting up a trust. Without proper terminology and funding, the trust may not be effective.
Now, let’s look at the three main characters of a trust.
Grantor
The person who creates a trust is called a grantor or settlor. They set the terms of the trust and fund it with the assets they want to protect and transfer.
Trustee
All trusts must have a trustee. This person (or entity) is responsible for administering the terms of the trust and managing the assets solely for the benefit of the beneficiary. The trustee is held to a fiduciary standard, meaning every decision they make must be in the best interest of the beneficiary.
With certain types of trusts, the grantor can appoint himself as the trustee and name a successor to take over after the grantor dies.
Beneficiaries
Trusts must also have named beneficiaries. A beneficiary is a person or entity who ultimately receives the trust assets.
Types of Trusts
Trusts come in all different forms and can serve just about any purpose. Some trusts are meant to hold life insurance, while others are established simply to avoid the probate process. There are three main categories of trusts: revocable, irrevocable, and testamentary.
Revocable
A revocable trust, also known as a living trust, allows you to retain control of your assets during your life. You can revoke it at any time before your death and appoint yourself as the trustee. Revocable trusts offer flexibility, can be used to avoid probate, and may provide estate tax advantages.
Irrevocable
As the name suggests, an irrevocable trust cannot be revoked or amended. Once the grantor transfers assets into an irrevocable trust, he or she can’t access them. This might seem restrictive, but irrevocable trusts are helpful in protecting assets necessary for long-term care and as a means of qualifying for Medicaid.
Testamentary
A testamentary trust is one that takes effect at your death and is created according to the terms of your will. Essentially, you can designate certain assets to transfer into a trust rather than be distributed outright to your heirs. This is useful for those with young children or grandchildren.
Specialty Trusts
Clients create trusts for all different reasons. Here are some examples of trusts that serve a specific purpose:
- Supplemental needs trusts,
- Life insurance trusts,
- Credit shelter trusts,
- Minor trusts,
- Qualified Personal Residence Trusts (QPRT), and
- Spendthrift trusts.
Reach out to our office to discuss these types of trusts in more detail.
How Can a Trust Strengthen Your Estate Plan?
Trusts are powerful estate planning tools when you create, fund, and administer them correctly. Here are the potential benefits of trusts.
Maintain Control of Your Wealth
As the grantor, you have complete control over the trust terms and assets. For example, you can put limitations on when the beneficiary receives trust funds and how they can use the assets. For blended families especially, trusts are incredibly helpful in ensuring certain family members are provided for. Trusts allow for more equitable and fair distributions when it comes to inheriting your estate.
Avoid Probate
Assets that are solely in your name at the time of death must go through probate. This is the legal process of verifying your property, proving the validity of your will, and distributing assets to your heirs and beneficiaries. Probate can be long and expensive. Typically, assets held in trust do not go through probate. They pass according to the terms of the trust document, not your will or a probate court’s order.
Privacy
A probate proceeding is a matter of public record. Trust documents, on the other hand, are private contracts. If you want to keep your financial matters and assets out of the public eye, trusts can accomplish that.
Tax Advantages
Trusts offer tax benefits when it comes to income, gifts, and estate taxes. For example, when you put assets into an irrevocable trust, those assets are not included in your estate. Thus, reducing the amount of estate taxes your heirs must pay.
Provide for Yourself
With a revocable trust, you can set money aside for your long-term care needs. This relieves the financial burden on your family if you become incapacitated. The trustee can manage your affairs by paying bills and making necessary distributions.
Protect Your Legacy
You worked hard for what you have. With a trust, you can protect your assets from creditors, lawsuits, or judgments against your estate. If you have concerns about the financial decisions of a loved one, a trust can help you protect your assets from their frivolous spending. For example, the trust terms may state that the beneficiary can only receive money from the trust when they turn 30. Alternatively, you can require incremental distributions of trust funds.
The Law Office of Andrew M. Lamkin, P.C., Can Create a Trust for Your Estate Plan
Founder and principal Attorney Andrew M. Lamkin can help you implement trusts into your estate plan. We provide creative estate planning solutions that meet your goals. For over 15 years, Mr. Lamkin of the Law Office of Andrew M. Lamkin, P.C. has been helping clients in New York City, Nassau, and Suffolk Counties with their estate planning needs. Request a free consultation by calling the office or going online. Mr. Lamkin will be happy to meet you in his office or at your home.
Andrew Lamkin is principal in the law firm of Andrew M. Lamkin, P.C., where he focuses his practice in the areas of elder law, estate planning and special needs planning, including Wills and Trusts, Medicaid planning, estate administration and residential real estate transactions. He is admitted to practice law in New York and New Jersey.
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