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).
It may seem that trusts primarily benefit those who are very wealthy and are trying to avoid federal estate taxes and that the 99.9% who are less wealthy and do not have to worry about federal estate taxes don’t need to consider trusts, but trusts can be used for many reasons other than avoiding federal estate taxes.
In 2022 you can protect up to $13,610,000 from federal estate taxes. This will 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.
If you create a living trust and can fund it, you have three choices to make.
Additional features to consider.
If you create a revocable trust, unless otherwise specified, only you can change it. Therefore:
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.
TRUST MENU | |
CHOICES BEFORE YOUR DEATH | |
Choose One | Reason for Choice |
▣ Living Trust ▢ Testamentary Trust | You opt for a living trust so you can alter the trust and transfer some assets to your children now if they need them. |
▣ Individual Trust ▢ Joint Trust | You choose not to include your spouse as a trustee due to their disability and create an individual trust. |
▢ You As Trustee ▣ Other Trustee | You choose another trustee concerned that you may soon be too manage it yourself, to avoid estate tax later, and to protect your assets from creditors. |
▢ Revocable by You ▣ Trustee with Power to Amend Trust ▢ Irrevocable | You make it revocable and allow your trustee to make alterations so your trust can evolve with your family’s changing needs. |
CHOICES AFTER YOUR DEATH | |
Choose All That Apply | Reason for Choice |
▣ Simple Trust ▢ Discretionary Trust ▢ Pot Trust | You can use a simple trust since your children are both adults, are capable of managing a trust, and will have no problem splitting the trust equally. |
▣ Special Needs Trust | A trust to provide for your spouse’s care and allow them to get Medicaid and/or Medicare. |
▢ Credit Shelter Trust ▣ By-Pass Trust | Your spouse will be provided for by their special needs trust so your remaining trust can by-pass them and go directly to your children |
▣ Generation Skipping Trust ▣ Indirect ▢ Direct | While you would like your children to benefit from the trust, you eventually want it to go to your grandchildren so you also make it an indirect generation skipping trust. |
The last things to consider are time, cost, and results.
Updated: January 19, 2024