A trust is a document that allows control of assets after death or making a gift beyond the limitations of a will.  From protecting minor children to maximizing legal options for minimizing taxes on an estate, there are many purposes of a trust.  Trusts can be revocable (the person giving the asset can take control of the asset again) or irrevocable (the transfer is permanent).  

The person or entity administering the trust is called the Trustee.  The trustee is responsible for the proper preservation or growth of the assets in the trust, depending on the direction given to them in the trust.  They are responsible for proper distribution from the trust, as well as maintaining an accounting of assets under management.  This is a role most often carried out by a trusted family member or family friend, but also held by attorneys, bankers, CPA’s, financial planners, or other professionals.

The most common types of trusts are:

Revocable Trusts

Revocable trusts can be revoked and modified at any time.  They are designed to allow the creator of the trust to have tremendous control over the assets.  This control can allow the trust to be flexible based on the needs of the beneficiaries, but it does not protect the assets from the creditors of the creator of the trust.  These trusts are often used to assist in avoiding probate, as the assets would be distributed as laid out in the trust at the time of the death of the creator of the trust.  The trust can either change to an irrevocable trust at death, be dissolved and assets divided at death, or remain a revocable trust with a new trustee in control and able to withdraw assets (typically set up with a spouse as the new controlling party).

Irrevocable Trust

Once assets are placed in an irrevocable trust, the transfer is permanent.  An irrevocable trust cannot be revoked, and it also cannot be changed or modified after it is created.  No one can remove assets from an irrevocable trust except as the trust designates, even the one who made the trust.  These give stronger protection for the assets, but they require that the trust creator completely give up possession of the assets placed in the trust.

Asset Protection Trust

An asset protection trust is (surprise!) designed to protect assets against claims from potential creditors in the future.  (Notably, you typically cannot divest yourself of assets in order to get out of a current creditor, as the creditor can follow the assets, and this may be considered a fraudulent transfer.)  To truly be effective, this type of trust has to be irrevocable.  (If you have the potential of getting the assets back, so would any creditor.)  Very often, these are created with a sunset clause so that the trust creator would receive assets back at a period of time in the future subject to certain conditions.

 

Charitable Trust

Charitable trusts are designed to transfer assets to a charity with controls in place for what the money is to be used for.  This could mean paying money over time to pay salaries of researchers for Alzheimer’s research at a non-profit that researches multiple diseases to simply providing steady income to keep a humane society running.  These can also be an effective part of an effective tax plan to coordinate gift giving with an overall tax strategy.

Special Needs Trust

A special needs trust is established for someone with special needs that will typically be life long medical or mental disabilities.  A special needs trust often has the added goal of providing for the individual without interfering with any government assistance that individual may be receiving.  This is a legal trust that is governed by the rules of the Social Security administration.  The beneficiary can have no control over the trust (in its administration, existence, or distribution of its assets). 

As laws change, it is common to add a provision that in the event that the government would have a claim to the money in the trust or that this money would prevent the beneficiary from receiving government aid, the trust would terminate and the funds would be dispersed to other individuals.
Because a special needs trust is so very restricted, it is easier for this trust than any other to fail to meet its goals by improper administration.

Spendthrift Trust

A spendthrift trust is designed to protect a beneficiary from their own irresponsibility or from their creditors.  In a spendthrift trust, the beneficiary receives a regular, periodic distribution in a predetermined amount.  In simple terms, the beneficiary gets a set amount and no more.  As the money is a set amount, creditors and the beneficiary are prevented from getting more money.  The money is not owned or designated for the benefit of the beneficiary until the distribution, so no one can get to the assets in the trust.

The upside is that the money is protected but the downside is that the beneficiary cannot get additional money out of the trust except for the regular payments.  Money needed for surgery, a down payment on a house, educational expenses, or any other expense would not be taken into consideration, and the trust simply pays the set monthly amount.

 

Springing Trust

Springing trusts are designed to spring into existence based on a triggering event.  While the most common event that will bring it into effect is death, other circumstances (such as a diagnosis of dementia) can be used to trigger the trust.  These trusts are effective at setting up conditions 

Testamentary Trust

A testamentary trust is one that comes into existence at the time of death and is included as a part of a person’s last will and testament.  This is a type of springing trust, and it is created through a will.  This type of trust allows funding to happen after death, and the testamentary trust is the most common trust.  These trusts can also have other elements (such as being created as a spendthrift trust).  Typically, a testamentary trust will cost less to create and does not need to be maintained during the lifetime of the testator (creator of the will and trust).

To speak with one of our trust and estate attorneys, call 770-863-8355 to schedule a free strategy meeting.