What Are The Types Of Trusts?

What Are The Types Of Trusts?

Creating an estate plan allows a person to better manage his or her assets and wealth. While a Last Will and Testament (will) is commonly associated with estate plans, many individuals choose trusts to transfer their assets to their loved ones. Trusts can provide many advantages, including protecting assets from tax complications. To learn what types of trusts are most suitable for your financial situation and for help with New York estate planning, consider contacting the Jennifer V. Abelaj Law Firm by calling 212-328-9568 to schedule a consultation today. 

What Is a Trust?

All trusts are legal agreements between a trustee and a grantor. According to the Internal Revenue Service (IRS), state law dictates how a trust is formed. First, a grantor establishes the trust and transfers assets into it. The grantor can name himself or herself and another individual as the trustees of the trust. The trustee has the responsibility of managing the assets for the grantor. Like a will, a trust can have beneficiaries. Often, the beneficiaries include the spouse, children, other family members, or close friends. Some grantors will name a favorite charity or organization as a beneficiary. After the grantor’s death, the trustee will distribute the assets according to the grantor’s wishes.

What Is Included in a Trust

A trust may include several types of assets, including:

• Life insurance policies
• Real estate property
• Deposit accounts
• Stocks, bonds, and money market accounts
• Antiques
• Business assets and interests

Once an asset transfers into the trust, it belongs to the trust, not the grantor. However, the grantor continues to hold the title of the trust property. At this stage, the grantor and trustee must handle those assets according to the terms of the trust. 

Different Types of Trusts

While different trusts accomplish various other goals, they share the common goal of minimizing or eliminating estate taxes while transferring assets to beneficiaries after the death of a loved one. The various types of trusts, though there are many, include two broad categories: 

• Revocable trusts
• Irrevocable trusts

Revocable Trusts

Revocable trusts are often called revocable living trusts. This type of trust allows the grantor to maintain complete control of his or her assets while still living. Revocable trusts can be changed or dissolved at any time, hence the name. This type of trust offers more flexibility to the grantor by not making the transfer of assets permanent until his or her death. All the assets remain in the trust until the time of death. At that time, the assets may be distributed immediately. Unlike wills, revocable trusts do not have to go through probate. Therefore, a person’s beneficiaries can receive the assets without the often-lengthy process and with more privacy than probate. 

Revocable trusts do, however, come with a few drawbacks. These trusts do not offer asset protection. All assets remain available to the grantor’s creditors. In addition, a revocable trust could interfere with the grantor’s ability to access Medicare or Social Security benefits, which may become an issue if long-term care is needed.

Irrevocable Trusts

Irrevocable trusts are different than revocable trusts. Most significantly, a grantor cannot make changes or modifications to an irrevocable trust after it has been created. Once an asset moves into the control of the trust, the grantor cannot undo that action. These trusts do not offer the same flexibility as revocable trusts, but many individuals choose irrevocable trusts as a safeguard for their assets. 

However, like revocable trusts, assets held in irrevocable trusts avoid the probate process by being immediately distributed to the beneficiaries. The grantor has control over when and how the beneficiaries will receive the assets. One significant advantage is that grantors place their assets into irrevocable trusts to protect them from the claims of other beneficiaries or creditors. Placing these assets into an irrevocable trust shelters them from estate and gift taxes. An irrevocable trust appeals to those who want to minimize the tax liability to beneficiaries on a large estate. 

Unfortunately, once assets transfer into an irrevocable trust, neither the grantor nor the trustee can access them. The trust terms remain the same, even if the grantor experiences a life change, such as divorce. Creating these trusts costs more than establishing a living trust and could benefit from legal help. Finding the right trust for your specific situation can be complicated. Consider contacting an experienced estate planning attorney at the Jennifer V. Abelaj Law Firm for help with choosing the best option for your estate.

Specialty Trusts

Specialty trusts apply to very specific situations. The most common include:

• Joint trusts
• Testamentary trusts
• Charitable trusts
• Special needs trusts

Joint Trusts

Often, two individuals will want to establish a trust together. This is called a joint trust. Many married couples choose this option. During their lifetime, the two grantors can control their assets. When one of the grantors passes away, the surviving grantor becomes the trustee. 

Testamentary Trusts

Another type of trust is called a testamentary trust or will trust. A person’s will sets the guidelines for creating this trust. While these trusts might seem similar to living trusts, they will not go into effect until the person dies. These trusts will go through the probate process and lose some of the privacy protections offered by other options.

Charitable Trusts

Charitable trusts are a common option for many grantors. When setting up a charitable trust, the grantor appoints an organization as a trustee. These trusts fall into the irrevocable trust category.

Special Needs Trusts

Special needs trusts are created for the benefit of mentally or physically disabled individuals under age 65 who require lifelong care. These trusts help provide financial assistance without jeopardizing the person’s Medicaid or Supplemental Security Income (SSI) eligibility. These trusts may also be called Supplemental Needs Trusts (SNT), according to the New York City Human Resources Administration.

Other Specialty Trusts

A few other common trusts include the following:

• Asset Protection Trusts—Offer protection from creditors
• AB Trusts—Like joint trusts but minimize estate taxes for married couples
• Blind Trusts—Beneficiaries have no prior knowledge of the assets in the trust
• Insurance Trusts—Established with an insurance policy

Talk to an Estate Planning Lawyer Today

Trusts are not just for the extremely wealthy. They offer protection of a person’s assets when sharing his or her legacy with loved ones. Having a trust can help a person make sure that the distribution of assets will meet his or her wishes. The types of trusts can vary, but there are plenty of options for your specific situation. Consider contacting a knowledgeable attorney at the Jennifer V. Abelaj Law Firm by calling 212-328-9568 to learn more about your New York estate planning options.