Types of Trusts
The basic trust that individuals and couples create to avoid probate is a revocable trust. This type of trust can be revoked or amended as many times as the creators wish, so long as they have the capacity to understand and make choices. Once a person is diagnosed with dementia or Alzheimer’s disease, for example, they may lack the requisite capacity to make changes to their trust. They can, however, give the power to amend their trust to another person; specific language granting this power must be included in the trust as well as in a power of attorney document.
If an individual or couple has assets that exceed the amount exempt from federal estate tax (currently 11.7M per person), then a trust can put a plan in place to reduce taxes and delay payment of any taxes until the surviving spouse has passed based on a concept called the “unlimited marital deduction.” Another important concept is “portability,” which allows the surviving spouse to capture the deceased spouse’s 11.7M exemption amount by filing an estate tax return. This guards against future reductions to the exemption amount and appreciation of assets over the surviving spouse’s lifetime.
A person can create an irrevocable trust that will effectively remove assets from their taxable estate, so long as it is set up properly and someone other than the person creating the trust acts as the trustee. For example, a large life insurance policy can be transferred to an irrevocable trust so that the insurance proceeds do not result in greater estate taxes to a person whose assets exceed the exemption amount.
Special Needs Trusts
If there is a person in your family that is disabled and receives government benefits, or may receive benefits in the future, a Special Needs Trust can be established either within a revocable trust or separately. These trusts ensure that assets are safeguarded for the benefit of the person with special needs and will not cause them to be disqualified from receiving government benefits.
There are many types of charitable trusts that a person can create to provide a benefit to their chosen charity. The benefit can pass to the charity during the lifetime of the person creating the trust or after their death. Great tax benefits can be achieved, so if you have a charitable goals you can explore options to create a Charitable Lead Trust, Charitable Remainder Annuity Trust, Charitable Remainder Unitrust and others.
Education and Pet Trusts
A revocable trust can have a component contained within it to provide education benefits for a beneficiary or to cover expenses of caring for a pet after a person’s passing. Provisions can dictate what funds will be used for, who will manage the funds and make distributions, and who will care for the pets.