If you are trying to put your affairs in order by making a will, health care directives, and other estate planning documents, you may be wondering whether you also need to make a trust. Although estate planning trusts offer several advantages, the best way to determine if you need to make a trust is to think about your reasons for making an estate plan, also known as your
estate planning objectives.Many people find there is a specific type of trust that helps them accomplish their estate planning objectives in a much better way than making a will, gifting, or other estate planning methods. This page provides an overview of how different types of trusts can be used to achieve your estate planning goals.
Trusts For Children
One of the primary motivations for people to make an estate plan is their children and grandchildren. As a result, many different types of trusts may be established for the benefit of children and grandchildren of the grantor. These trusts can differ based on factors such as the child's age, health, financial situation, pattern of behavior, marital status, etc.
For example, if your child needs to qualify for Medicaid for certain health care sevices, you may need to establish a special needs trust to ensure an inheritance or gifts do not disqualify your child from receiving government benefits.
If you have an adult child with financial problems or have concerns about their spouse or partner, you may want to avoid your child inheriting a large lump sum. In these circumstances, some parents decide to make a
spendthrift trust so their children will not be able to quickly spend through an inheritance. If your child has problems with addiction that may result in large medical expenses or you want a trustee to manage the inheritance for them, you can use a living trust to place restrictions on assets you leave to your child.If you want to prevent your child from learning about a large inheritance they will receive until they are more mature, consider making a
Trusts to Reduce Taxes
Many different types of trusts have been developed for the purpose of reducing taxes, such as estate, gift, and generation-skipping transfer taxes. Because of the tax laws and regulations that apply, these types of trusts are usually expensive to create. In addition to requiring an attorney to set up the trust, there are record-keeping requirements and legal formalities that must be observed.Examples of types of trusts used to reduce taxes include the following: Life Insurance Trust, Minor's Trust,
Crummey Trust, and Power of Appointment Trust.
Trusts in Your Will
The most common type of trusts, revocable living trusts, are created by the grantor or settlor while alive. These are known as inter vivos trusts. However, you can include provisions in your estate plan for a testamentary trust to be created after your death. A
Testamentary Trust is made pursuant to the terms of a last will and testament. If you are interested in this type of trust, ask your estate planning attorney whether it is necessary.
Other Types of Trusts
Other forms of trusts used in estate planning include:
One of the most popular types of estate planning trusts is the revocable living trust. However, there are many other types of trusts that may be useful in your estate plan. One of the most valuable roles an attorney can play is helping you determine which type of trust is best suited to your unique circumstances and estate planning goals.This page features a brief summary of many different types of trusts. Browse the sections below to learn more about how each type of trust is used. For more details on the types of trusts used in estate planning, see more about trusts.
Trusts For Pets and Other Animals
If you have a dog, cat, bird, horse or other animals, think about what will happen to them if you die suddenly or become disabled. Pets and animals need to be considered in estate planning because they are totally dependent on their owners for food, shelter, and daily care. Unfortunately, animals are usually overlooked by people making an estate plan. This leads to many beloved pets facing tragic circumstances and sometimes death simply because their owner did not provide for them in a pet trust or make other arrangements in an estate plan. To learn about the type of trust you can make to provide for the care and maintenance of your animals, see
Trusts to Benefit Charity
Another common reason for making an estate plan is to ensure at least some of your estate passes to charity rather than your legal heirs. Sometimes it is difficult to determine how much you should gift to your favorite charity while you are alive, because you may need money to pay for unforeseen medical expenses and long term care.
One way to deal with this dilemma is to make an estate planning trust. There are several advantages to using a trust to leave some of your estate to a non-profit organization. To learn about estate planning methods you can use to further your charitable goals, see
charitable remainder trusts.
Trusts to Pass on Family Wealth
If you want to establish a trust to provide for future generations of your family, you may want to learn about dynasty trusts. There are several advantages to using this type of trust. If estate, gift or generation-skipping transfer taxes are a concern, a dynasty trust may help preserve more of your estate for your beneficiaries.Dynasty trusts can be drafted in a way that allows you to fulfill several types of estate planning objectives. One of the primary goals of this type of trust is to allow family assets to grow over time by utilizing tax-saving strategies. Also, if you are concerned about asset protection from a beneficiary's creditors, divorce, etc., you may want to consider a dynasty trust.
To learn more about trusts to benefit your children, grandchildren, and other heirs, go to
Trusts to Pay Funeral Expenses
If you want to take control of your final arrangements, you may want to set aside funds in advance to cover the costs of funeral, burial or cremation. Depending on the state where you live and the amount you expect the arrangements to cost, there may be advantages to making a
Funeral Trust. Talk to your life insurance agent about setting up this type of arrangement. Then coordinate with a funeral director about the options to prepay your funeral expenses.
Before You Make a Trust
The provisions of any type of trust are usually complex. Even if you have experience dealing with legal issues in business, it is unlikely you will be able to properly establish and maintain a trust without a lawyer. See finding an attorney.Before making a trust, you should also ask your lawyer whether the trust is revocable or irrevocable. Many trusts that have tax advantages are irrevocable. Several other types of trusts also require the irrevocable transfer of assets, which means you cannot get your property back if you change your mind. Therefore, before signing a trust document, make sure you know if it is an
Irrevocable Trust.After the trust is drafted and executed, there are several additional steps that must be taken to fund the trust. These steps often involve changing how you hold title to property, how accounts are registered, naming new beneficiaries of insurance policies, executing trust transfer deeds, etc.
When creating a trust as part of a tax strategy, the trust document can be even more complicated. Consult an estate planning attorney when considering any type of trust. If you attempt to set up a trust on your own and miss important details, it can have disastrous effects on the distribution of your estate, including adding the costs and delays associated with probate and increasing estate taxes, generation-skipping transfer taxes or gift taxes.
This article was updated on June 6, 2017.
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