Families are messy.
Most of the time, the family you’re creating with your spouse looks MUCH different from the one either of you grew up in.
So when you start thinking about how to make sure your children are taken care of when you’re gone, there’s a lot to consider.
Will your families fight over your children? Will your kids have access to the resources you’ve built for them? And depending on your situation, you may be worried about your money being wasted, or not used the way you intended.
Besides creating a will—which you absolutely should do—the next step might be to put your assets into a trust.
“Okay, Kirsten, sounds good,” you might say. “I’m going to set up a trust. But what is it?”
A trust is a separate legal entity that serves a purpose defined by you. There are three primary roles for people in a trust:
- Creator (also known as a Settlor or Grantor),
- Trustee (who manages the trust),
- Beneficiary (who receives the benefit of the trust).
Your needs will determine the type of trust and the role or roles you will play in your trust.
In this article, let’s start with some basic categories of trusts. This will give you a framework for information when you sit down with your estate planning attorney.
Here’s what we’re going to cover:
- Understanding Living Trusts
- Revocable Living Trust
- Irrevocable Living Trust
- Exploring Testamentary Trusts
- Special Needs Trusts
- The difference between first-part and third-party special needs trust
- Asset Protection Trusts
- Schedule a Consultation with Schroeder Larsen Law: Get Your Perfect Trust Set Up Today!
1. Living Trusts:
The most common type of trust is a living trust. A living trust serves you during incapacity and acts as a Will substitute upon death.
Picture a trust that lives and breathes with you and carries on after you (that’s why it’s called a living trust.) You can actually be the trustee (which means you have control over your assets) — or you can choose someone else as your trustee. The assets in the trust are the responsibility of the person you choose as the trustee. They can manage and distribute the assets in your trust according to your instructions. A key feature for most living trusts is they are revocable. As your life changes, you can amend or revoke your trust to accomplish new needs.
Advantages of Living Trusts:
- Avoiding Probate- Living trusts can pass directly to your beneficiaries without probate (which can be time consuming and costly.)
- Privacy Protection- A Will becomes public once it goes through probate, but a living trust is private and confidential when transferring your assets.
- Revocable- Which means you can make changes to it or even revoke it during your lifetime.
Disadvantages of Living Trusts:
- Cost– You will have more attorney fees creating a trust than you do with a Will.
- Management and Administration– After your death, your trustee will assume management of your trust and be responsible for filing tax returns, keeping records, and making sure your assets are appropriately managed and distributed according to the trust’s terms.
- Potential Complexity– Living trusts require careful planning, and legal expertise, and most importantly correctly transferring ownership of assets to the trust.
Revocable or Irrevocable… What’s the Difference?
Revocable Living Trust: You keep the ability to modify, amend, or revoke the trust during your lifetime. You’re in control when it comes to the trust and its assets. This means you can change beneficiaries, or even alter the terms of the trust document as your circumstances or wishes change over time.
Irrevocable Living Trust: This type of trust can’t be modified or revoked except in limited circumstances Once you have established the trust, you release control over the trust assets. When your assets are transferred into the trust, however, they may be protected from lawsuits, creditors, or possible estate taxes.
2. Testamentary Trusts:
A testamentary trust is created in your Will, and only becomes effective when you die. Unlike a living trust, there’s no incapacity management. However, it is useful for limited assets or specific circumstances at death, like minor children.
Advantages of Testamentary Trusts:
- Assets are Protected– When your assets are in a testamentary trust, you can protect them from creditors, divorces, or lawsuits. It also gives an extra layer of protection for your beneficiaries, keeping their inheritance safe from outsiders.
- Estate Taxes Minimized– If your testamentary trust is structured correctly, it can help minimize your estate taxes so you can keep more of what’s yours for future generations.
- Keeps Privacy & Avoids Challenges in Probate– Just like other trusts, testamentary trusts are privacy protected and don’t become public during the probate process. A testamentary trust can also help avoid any potential challenges to your estate. This is because there are clear instructions given for asset distribution.
Disadvantages of Testamentary Trusts:
- Probate Process– Testamentary trusts are put in place through your Will, which means that it can go through the probate process. Probate can take a long time and cost a lot of money. It can also slow down the distribution of assets to your beneficiaries.
- Lacks Immediate Control– Testamentary trusts only come into play when you pass away. This means that you don’t have immediate control over your trust assets, and you don’t have the ability to make changes or adjustments if your circumstances change.
- No Privacy– Since a testamentary trust is created through your Will (which becomes public record when it’s in the probate process) — all of the details of the trust, such as the asset distribution and beneficiary information is accessible to the public.
3. Special Needs Trusts:
A special needs trust legally allows you to set aside money and other assets to benefit your loved ones with special needs or disabilities. Its purpose is to provide financial support to your disabled loved one without jeopardizing their chance to be on government assistant programs (like Medicaid or Supplemental Security Income, SSI).
Advantages of Special Needs Trusts:
- Supplements Government Benefits- Even though government assistant programs provide support, they might not cover all the expenses related to your loved one’s disability. By having a special needs trust, funds are allowed to be used to supplement those benefits that might not be covered by government programs (like special therapy, transportation, recreational activities and more).
- Guarantees Long-Term Financial Security- If your special needs trust is structured really well, it allows family (and others) to set aside funds and assets that’ll be beneficial to your loved one throughout their life! This gives you peace of mind knowing there are resources available to support your disabled family member when you’ve passed away.
- Flexible When Managing Assets- Special needs trusts give you flexibility on how assets in the trust are managed and distributed. You can make decisions based on your loved ones specific needs and circumstances. This guarantees the funds for your loved ones care is protected and used only for their benefit.
Disadvantages of Special Needs Trusts:
- Restrictive Asset Use- There are very strict rules on how a special needs trust fund can be used. It’s best to hire a professional trustee that has experience handling special needs trusts. They can help navigate these restrictions so your loved one still remains eligible for government benefits. Also, it’s important to know the limitations on using funds for expenses. They can’t be used on things like food and basic support.
- Possible Impact on Government Benefits- Even though special needs trusts are designed to protect your loved ones eligibility for government benefits — if it’s not managed correctly, it can affect those benefits. You have to make sure you have a professional trustee who can carefully plan and follow the rules, so there aren’t any accidental consequences.
- Losing Direct Control- When assets are put into a special needs trust, it no longer gives parents/guardians direct control over them. However, the person who’s responsible for managing the trust (the trustee) has the power to make decisions on the beneficiary’s behalf. It might feel challenging to lose control over the assets, especially if you like being directly involved in financial matters.
What’s the Difference Between a First-Party and Third-Party Special Needs Trust?
A first-party special needs trust is created with the assets and funds that belong to the person with special needs. This usually happens if the person with special needs comes into a large amount of money through an inheritance. A third-party special needs trust is funded with the assets from someone other than the person with special needs. It also doesn’t have the need to pay back Medicaid.
4. Asset Protection Trusts:
An asset protection trust is comparable to a “special container” for your assets, managed by someone you trust. When you put those assets into the trust, it makes it difficult for creditors or legal troubles to touch them. This is because the transfer is irrevocable and the assets are legally separate from you. You no longer directly own the assets, but the trustee is in charge of managing them. It’s a great way to keep your assets and wealth safe, while also protecting them from possible financial problems.
Advantages of Asset Protection Trusts:
- Protected From Creditors: Your assets are protected from potential creditors once they’re transferred into the trust. Even if someone files a lawsuit against you or you face debt, the assets that are in the trust can’t be touched by creditors.
- Strategy for Estate Planning: Asset protection trusts can be made a part of your estate planning strategy. You’re able to pass on your assets to the beneficiaries you’ve chosen — and they will remain protected from possible risks.
- Flexibility and Control: Even though your assets are in a trust, you do have a certain level of control. You can have the option to receive income or benefits from the trust if it’s within the terms and conditions.
Disadvantages of Asset Protection Trusts:
- Irrevocability: Asset protection trusts are designed to be irrevocable. This means you can’t easily change it or terminate the trust once it’s been created and established. Your control is limited over the assets that are in that trust, so you’ll definitely want to talk with a professional and see if it’s right for you.
- Legally Complex: Having an asset protection trust can be legally complex, so it requires very careful planning and documentation. If you work with an experienced attorney, they’ll help make sure the trust is structured correctly and complies with certain laws.
- Limited Access to Assets: It depends on the terms of the trust, but typically you’ll need to follow specific guidelines or rely on the trustee in order to receive any income or benefits from the trust. Since there’s a limitation, you might not be able to have any freedom to control the assets in the trust.
Having a trust is like building a strong bridge between generations. It allows you to provide for your loved ones while leaving a lasting impact. It’s a smart move that’ll bring you incredible benefits, and most importantly, peace of mind.
When you’re estate planning, it’s super important to talk to your advisors about what kind of trust might be appropriate for your needs.
Having a team who knows the ins and outs of trusts will make estate planning much easier. That’s why at Schroeder Larsen Law, I will get to know you and your circumstances so we can find a trust that aligns with your goals and needs.
Click the link right now to schedule an informative consultation — we’ll discuss how to get the perfect trust set up for you!