Helping You Understand the Different Types of Trusts
As of today, the vast majority of people have done no estate planning. The COVID-19 pandemic has caused more and more people to think about how important estate planning is for them. When thinking about basic estate planning, most people believe the best option is simply drafting a will.
A will deals with your property, as well as important decisions regarding minor children, should both parents pass away. However, given the legal proceedings that happen before assets are distributed among beneficiaries, many estates should establish a trust. In its simplest form, a trust is an agreement between two parties: a settlor and a trustee. Trusts can be established for several different reasons.
Some trusts are established to manage spending for beneficiaries who might be unable to manage investments alone. Trusts can also be established to protect assets from creditors or to protect premarital assets from inclusion in divorce settlements. Other trusts are made for assets that are not easily divisible, like pets, vehicles, and different types of real estate. Trusts can be established for charitable gifting that reduces income taxes for the settlor.
In essence, trusts are established to make sure the process of distributing assets goes smoothly at the time of your passing. There are different kinds of trusts, depending on your situation. Understanding each of these types of trusts will help you decide which one is best for you.
For a thorough explanation of the different kinds of trusts available to you, speak with our Visalia trust attorneys at the Martens & Brusseau Law Corporation. Call (559) 622-8640 or submit an online contact form today.
Revocable Family Trust
A revocable family trust is a flexible way to safeguard your assets during and after your life. It is generally between three parties: the owner of the trust, the trustee, and the beneficiary. The trustor, or owner of the trust, generally retains full control over the trust throughout their life.
The trust can be edited through amendments or restatements, letting the owner change the trust if necessary. It's important to ensure that all state laws are followed to make certain amendments or restatements are valid. Upon the trustor's passing, the control of the trust goes to the trustee. They will manage the trust and deliver the assets to the beneficiary as long as they can meet the requirements in the trust.
Irrevocable trusts are the opposite of revocable trusts because they cannot be changed or altered in any way once the trust has been created and executed without the permission of the trust's named beneficiaries.
There are more favorable tax consequences when using an irrevocable trust, so it's a great option for those attempting to protect the estate from estate taxes, probate courts, and creditors. However, when using an irrevocable trust, you'll essentially lose control over your estate, so it's up to you to weigh the pros and cons when deciding what trust you want to establish.
Charitable trusts are a type of irrevocable trust. They are generally a set of liquid assets a donor signs over for a charitable foundation to use. For example, the Bill and Melinda Gates Foundation is a charitable trust that currently has assets worth more than $30 billion dollars. The assets are held and managed by the charity, using them for a specified period.
These trusts can be established in a way that allows the donor to decide where the assets will go after the specified period ends. For example, the donor can decide that the assets will stay with the charity upon expiration of the trust, or the donor can decide that the assets will go to other beneficiaries.
Special Needs Trust
There are two different special needs trusts, normally referred to as first-party SNT and third-party SNT. A special needs trust is established to help loved ones with special needs, as they may not be able to manage their financial situations in the future themselves.
A first-party SNT is used when a person with disabilities inherits money or property. A third-party SNT is used by a person planning to distribute their assets to a loved one with special needs. These trusts are established to asset a person with special needs while not reducing their eligibility to receive public assistance disability benefits from social security, Medicare, or supplemental security income.
Tax Bypass Trust
A Tax Bypass Trust, also known as an AB trust, is a trust designed to help married couples avoid estate taxes on certain assets when one of the two spouses passes away. After the death of one spouse in a marriage, the assets in a trust are split into two different trusts.
One of these trusts, called an A trust, is a marital trust. The other is considered the bypass trust, or B trust. The marital trust belongs to the surviving spouse. They have full control over the assets as the trust remains revocable. The bypass trust is irrevocable, which means it cannot be changed. The bypass trust is often used because it can help minimize federal and state taxes for married couples who have large assets.
A Clayton Election is related to the tax bypass trust mentioned above. The election is made when one spouse in a marriage passes away. The trustee, who is generally the surviving spouse, makes the decision to allocate the assets into two new trusts. One of which is called a Survivor's trust, while the other is called a Marital trust. As long as both trusts are filled with assets that are communal property between the spouses, the surviving spouse will have both trusts in their estate.
The Survivor's trust is revocable while the Marital trust is irrevocable. The difference here is that when the second spouse dies, there is another full step-up basis in both trusts. Assets will then be distributed among the beneficiaries of the trusts. This is another way to help your beneficiaries avoid common estate taxes. We can advise you on whether this is the best way to go with your estate.
A Marital trust is an aspect of the tax bypass trust and the Clayton election discussed above. The Marital trust is a way for a spouse who passes away to give their assets to their surviving spouse completely tax-free since the assets are given on a full step-up basis. This type of trust is irrevocable.
Spouses have a tax advantage when assets are being transferred from one spouse to another spouse in the form of an unlimited marital deduction. This basically means that one spouse could theoretically put unlimited assets into a marital trust, and the other spouse would not have to pay any taxes on the amount they receive from the trust. This is another way to maximize your estate tax exemption for your beneficiaries who will receive the estate after the passing of the second spouse.
A single trust and a joint trust have essentially the same purpose; they are designed as a way for a trustor to leave property and assets to specific individuals upon the death or deaths of those who created the trust. The only difference is that a single trust is created by a single individual, while a joint trust is created by multiple individuals.
This means that the assets in the trust will be under the management of a trustee upon the death of the individual who created the single trust, rather than waiting for each trustor to pass before the trustee gains control of the assets. Single trusts are often held in control by single trustees, although this is not a requirement for the trust. The only requirement is that the trustor is a single person rather than a married couple, which are the main creators of joint trusts.
A survivor's trust is the other half of the split that takes place when one spouse dies with an AB trust in place. While the marital trust that was created is irrevocable, the surviving spouse has full control over the survivor's trust, which contains half of the assets. The surviving spouse can choose to amend or restate the survivor's trust as they please. This spouse can do whatever they choose to do with their property.
In some trust agreements between spouses, the surviving spouse is left as the only trustee, and they have the power to put split the assets between the marital trust and the survivor's trust at their own discretion. In the end, the purpose of the survivor's trust is to give the surviving spouse the same power that both spouses had over the assets before the passing of the first spouse.
As you can see, there are many different types of trusts, all of which are important to understand to pick the proper trust for you and your family. Your goal is to help the process of transferring your assets to your beneficiaries go as smoothly as possible while paying the least amount in taxes as possible. At the Martens & Brusseau Law Corporation, we can help you look at your personal situation and determine which trust is best for you and your beneficiaries.