A trust is another way to leave your estate to your beneficiaries. A trust is a fiduciary (financial) relationship in which you, as the trustmaker or creator (called the “grantor” or “settlor“), give a trustee, who could be you or another person, the right to hold title to and manage your property or assets for the benefit of a third party, the beneficiaries (those who may benefit under the trust).
Trusts primarily benefit those who are very wealthy and are trying to avoid federal estate taxes. The 99.9% who are less wealthy do not have to worry about federal estate taxes.
Thirteen states have estate taxes that apply to a greater percentage of the population in that state.
In 2020 you can protect up to $11,580,000 from federal estate taxes. This will increase to $11,700,000 in 2021 and continue to increase to keep pace with inflation until 2025.
For those who are not wealthy enough to be concerned with these limits, there may be other reasons to consider a trust.
It can be difficult to keep the various trust options straight. There are a number of ways to look at and compare the different trust choices to help you determine which is best for your situation.
One confusing aspect of trusts is that the name chosen for your trust does not necessarily describe the features and may be an abbreviated version. For example:
Some options presented as types of trust are frequently a combination of the features that you chose for your trust.
Do you want the trust to be created and begin to be managed before your death (living trust) or outlined in your will to be created after your death (testamentary trust)?
Are you able to fund it (funded trust) or not (unfunded trust)? A trust is useful unless funded.
If you create a living trust and can fund it, you have three choices to make.
Should you give your trustee emergency power to alter the trust (“Power to Amend Revocable Living Trust Agreement” or a Testamentary Power of Appointment) if needed or not allow it, even at your request?
Do you want your adult beneficiaries to have control of the assets right after you die or have them managed by a trustee (Discretionary Trust) until they are truly capable of doing so?
Are you leaving any of your estate to minor children with a trust that exists through the death of your surviving partner (Credit Shelter Trust) or onlyjust until they come of age?
Do you want to lock in what each minor beneficiary gets with an individual trust or group them together in a Group or Pot Trust to allow the flexibility to adapt to individual needs?
Do you have dependents with disabilities that will need a Special Needs Trust?
If you create a trust, unless otherwise specified only you can change it. Therefore:
Minor children must have a trustee to manage the trust until they are of legal age.
Discretionary trusts only apply to adult beneficiaries.
Special needs trusts are only appropriate for disabled beneficiaries.
A family trust is merely a description of any trust going exclusively to family (related by blood, marriage, or law [in the case of adoption]) and not a type of trust.
Whatever the type of trust or name given to it, your trust is the sum of all the terms, provisions, and other features it contains. Instead of trying to determine what type of trust you want, determine what features you want the trust or trusts to have.
It may be best to think of creating a trust like going through a menu. For example, if you are creating a trust because you are ill and have two adult children with their own children, who are approaching college age, and a disabled spouse, you will be creating a Family Trust since only relatives are included.
Choices Before Your Death
Choose One Feature From Each Row
Reason for Choice
☑ Living trust,
𝥷 Testamentary trust
You opt for a living trust so you can transfer some assets to your children now, avoid some estate tax later, and protect your assets from creditors. Testamentary trusts created in a will are subject to the probate process.
☑ Individual trust
𝥷 Joint trust
You choose not to include your spouse as a trustee due to their disability and create an individual trust.
𐄂 Owner as trustee
☑ Other trustee
You choose another trustee since you may soon be too ill to manage it yourself and further protect assets from creditors.
𐄂 Revocable by you
☑ Irrevocable by you & other trustee
𐄂 Emergency trustee adjustment clause
You make it irrevocable in case your judgement becomes impaired from illness. You do not include any clause allowing the trustee to make changes, so they can’t be influenced by you. If you do not name yourself as trustee, this will protect the assets from creditors and lawsuits.
Choices After Your Death
Choose All Features That Apply
Reason for Choice
☑ Simple trust
𐄂 Discretionary Trust
𐄂 Pot Trust
You can use a simple trust; a Discretionary Trust is not needed since your children are very capable of being trustees. Your children are over 25 years old and have similar needs so can split the inheritance evenly without the need for a Pot Trust.
☑ Special Needs Trust
To provide for your wife’s care and allow her to continue to get Medicare.
𐄂 Credit shelter trust
☑ By-pass trust
Your spouse will be provided for by their Special Needs Trust so your remaining estate can go directly to your children.
☑Generation skipping trust
You choose an indirect trust that allows your children to benefit from the trust, but have it eventually go to your grandchildren.
The last things to consider are time, cost, and results.