The trust debate rages with many clients who ponder, “do I really need a trust?” Many think trusts are only for the super wealthy. The answer is usually, “it depends”. Every situation is different and requires a custom-tailored estate plan. Some plans do not require the use of a trust. A will can sufficiently address all concerns and meet the goals of the client. When a trust is recommended, more importantly, it must be determined which type of trust best suits the situation at hand.
There are 5 main types of trusts utilized most frequently in estate planning:
1. Family Trust – This trust vehicle avoids probate, which can be costly and time-consuming. It holds assets for your intended beneficiaries and allows you as the grantor of the trust to set out terms for how and when assets are to be distributed. You can choose incremental distributions rather than a lump sum and you can protect assets intended for minors. The big issue with a family trust is determining who should serve as the trustee. An experienced estate planning attorney can help you choose someone who will uphold the fiduciary duty and abide by your stated terms.
2. Special Needs Trust – A special needs trust holds assets for a person with disabilities who may be receiving government benefits. To qualify for government benefits, an individual must meet certain income and net worth requirements. If the assets were distributed outright to this individual, he or she may lose their government benefits. This can be avoided by the use of a special needs trust. An experienced attorney should draft this type of trust because it must be worded correctly to be effective.
3. Irrevocable Life Insurance Trust – The trust itself is both the owner and beneficiary of one or more life insurance policies. Upon the death of the insured, the trustee invests the insurance proceeds and administers the trust for one or more beneficiaries. The purpose is to reduce estate taxes by removing the life insurance benefits from the taxable estate. These types of trust must also be written by an experienced and knowledgeable attorney as they need to be carefully worded.
4. Medicaid Trust – These trusts help protect assets (usually real estate owned by the grantor of the trust) from Medicaid and long-term care liens. Medicaid has a 5-year look-back period so it is important to plan ahead.
5. Credit Shelter Trust – This trust is specifically for married couples. The way to preserve both spouses’ estate tax exemptions is to create a “credit shelter trust” (also called an A/B or bypass trust). Other benefits to this type of trust include it shields the assets funding the trust from creditors, it protects a child’s inheritance if the surviving spouse remarries and it avoids a lot of administrative headaches over changing laws.
If you think a trust may be a wise strategy to include in your comprehensive estate plan, contact Stouffer Legal in the Greater Baltimore area for a consultation. We can provide more information on the different types of trusts and how they may help you accomplish your financial and retirement goals. You can schedule an appointment by calling us at (443) 470-3599, emailing us at office@stoufferlegal.com, or register for an upcoming free webinar using the link below:
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