Trusts used to be something just for the rich. And maybe you still think of “trust fund babies” and huge estates. Thankfully, this legal tool is available to anyone. And there are countless ways to set up a trust to benefit your family, friends or an organization of your choosing.
There are two major categorizations when it comes to Trusts. Revocable vs. Irrevocable and Living vs. Testamentary. So let’s cover that first:
Revocable: The person who created the trust can change or terminate the trust however and whenever she or he would like.
Irrevocable: The person who created the trust no longer has the power or access to change the trust or remove anything from the trust.
There’s plenty of reasons for both kinds. If you are trying to qualify for medicaid later in life or if you are trying to shield your assets from creditors, you might prefer an irrevocable trust. If you want the safety net of taking things back out of the trust in an emergency, you might prefer a revocable trust. For example, you might want to leave everything to your children but want that financial safety net if your health deteriorates and you will require full time care.
The other set of categorization is Living vs. Testamentary. And this one is basically how the Trust was created. If the person creating the trust is still alive, it’s a living trust. If the trust is created from the terms in a Last Will and Testament, it’s testamentary.
There are reasons why each different type should be used, and it is helpful to discuss these reasons with your attorney.
A Revocable trust can become an Irrevocable trust when certain ‘trigger’ events happen, but an Irrevocable trust can never become a Revocable trust. It is truly a ‘one way street’. And you can even set up a trust where when a married couple dies separately, portions of the Revocable Trust become Irrevocable without making everything Irrevocable. But every trust or portion of a trust at all times is either Revocable or Irrevocable and every trust is either Living or Testamentary.
Who owns and controls the assets in the trust?
The assets are owned by the trust itself, which means that the owner is no longer you or your family. The control of those assets is made by the person that is named as the Trustee. In a Living Revocable Trust, you can name yourself as the Trustee, so you can continue to make the decisions about those assets . In an Irrevocable Trust, you must name someone else to make the decisions about those assets, and you can NOT make any decisions about the assets yourself.
Now, having laid out these two broad categories, let’s talk about 8 common types of trusts.
This is the most common and simple setup. A revocable living Trust basically does all the things your Will could have done but setting it up ahead of time so that the person who is managing your trust, your trustee, has immediate access to do all the things you want. One of the main reasons that people draft a Revocable Living Trust is so that you don’t need to open the probate process in every state in which you own real estate. A Revocable Living Trust is also helpful when you want to distribute your assets in a ‘blended’ family situation. A Revocable Living Trust also allows the process to go much faster and the assets can be distributed more quickly than if you distributed things through a Last Will and Testament.
Parents (or grandparents) of minor children can set up a trust where their assets go into a trust and then are released to their children based on the wishes of the person creating the Trust. Example, half of our assets will be released on the child’s 21st birthday, a third on the 30th and remaining on the 35th. Or they can leave the release of assets entirely up to whomever they choose as a Trustee to manage the trust. A Trust for Minors can be included in either a Testamentary Trust or a Revocable Living Trust.
This is an Irrevocable Trust that people can set up ahead of time when they might want to qualify for Medicaid. This Trust actually GIVES your assets away to the Trust, and as of today, this must be done at least 5 years in advance of a Medicaid application in order to be outside the ‘penalty’ window. The Irrevocable Trust protects assets from being used to pay for Medicaid expenses. You can also set up this sort of Trust whenever you want to shield your assets from creditors. There are a lot of rules regarding these types of trusts but it’s a common request. Just remember that when you set up an Irrevocable Trust, the assets that are put into that Trust no longer belong to you and you no longer have any control over those assets at all. You are truly ‘giving away’ your assets to the Trustee to use as they see fit.
These are usually trusts set up by parents or other relatives of individuals with special needs. As special needs children grow into adulthood they are often provided benefits by the government. And those benefits are often based on the fact that they (1) have special needs but also, (2) that they have financial need. So this type of trust allows a parent to give a special needs (minor or adult) child assets that won’t ruin their eligibility for government assistance.
The term ‘Testamentary Trust’ has legal significance because Testamentary means the terms came directly from a Will (aka, Last Will & Testament) of an individual. A Testamentary Trust doesn’t exist until it is created in the Last Will and Testament and the terms of the Trust are all outlined in the Last Will and Testament. Remember that a Will can be changed at any moment up until the person takes their last breath, so a Testamentary Trust really does not exist at all until after the deceased person has taken their last breath.
This type of Trust is used to give part of the assets of a married person to his or her spouse when they die, because the estate tax liability for the transfer of assets to a living spouse is generally lower (or non-existent) when compared to the estate tax liability for the transfer of assets to someone other than a living spouse. This was really important when the Estate Tax was charged on a relatively modest estate (approx. $600,000), but it has become less important as the Estate Tax limit was raised. Often, there is no dollar amount actually stated in the Trust itself, but the language would instead say that the amount up to the estate tax liability, would be put into the ‘regular’ trust with the remainder of the estate value being put into a spousal trust. With the current (as of today) estate tax liability starting only on an Estate with assets over $11,000,000.00, this has become less important. But we can never know what the tax laws will be in the future, so the Spousal Trust might return as an important Estate Planning tool.
This is an IRS recognized term, so most attorneys describe it as a “Charitable Trust” and there are two most common types, Lead or Remainder. So a Charitable Remainder Trust is one where a person sets up an Irrevocable Trust and part of the terms of that Irrevocable Trust is to get some sort of income from it. And then when they die, whatever is remaining goes to the charity. There’s quite a few reasons to set something like this up, including a income tax benefit for the person who set it up right away. It’s an Irrevocable Trust so they don’t have access to it besides the income paid out, but because it’s eventually going to a charity, they get the income tax benefit while they are alive, before it goes to the charity.
This is named after a specific court case and has everything to do with avoiding estate taxes. Everyone is allowed to give an annual amount (currently approx. 15K) as gifts to whomever they want, each year without paying estate taxes on those gifts. Before this specific court case if you put that 15K gift in a Trust you would still have tax implications because the beneficiaries would have a large benefit at the end. By setting up a Crummey Trust you provide the beneficiaries what is called, “Crummey Benefits” which basically means each time you transfer that 15k gift you give the beneficiary the option to access those funds immediately, say for 45 days. If after the 45 days the funds aren’t accessed they then go into the Trust.
The bottom line is that Trusts are customized for your unique needs. These are simply legal vehicles to get your assets where you want, when you want and to whom you want. It’s very important to use an estate planning attorney when you set up Trusts. I’m the first to tell you when you don’t need a lawyer, but this is not the case with Trusts. Tax implications change, legal loopholes get fixed. If you were to think of legal specializations like medical ones, Trusts are the neurosurgery of the law. Mistakes can void entire Trusts and by their nature, you won’t be around to redo them. So in this case, please reach out to an experienced estate law attorney.
Even if you are just maybe sort of thinking about setting up a trust, get solid legal advice from the start. I would love to chat with you by phone or have a visit in our office. My initial consultations are charged at a reduced rate of $200. If you are interested I can walk you through all the possibilities that make sense for your specific situation.