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What Trust is Best for Your Family?
There are as many kinds of trusts as there are circumstances resolved by trusts. Which trust is correct for you depends on what you are trying to accomplish and if you want the trust to function while you are living, after death, or both.
A revocable trust is one of the more commonly used trusts. The person who creates it, the grantor, is typically the trustee charged with managing the trust. With this dual role, the grantor has total control and can even amend the terms of the trust itself. However, the revocable trust offers no unique protection from creditors or estate taxes. When the grantor dies, the trust becomes irrevocable.
An irrevocable trust is created by a grantor. However, the grantor has no control over assets. The trustee is responsible for administering the trust and following all directions of the trust documents, including asset distribution. On the upside, an irrevocable trust can be created and funded with special creditor protection and estate tax savings.
Other frequently used trusts include:
Medicaid Asset Protection Trust
The Medicaid Asset Protection Trust (MAPT) protects assets from being counted for Medicaid eligibility. The trust must be created and assets must be transferred into the trust five years before the individual applies for Medicaid. As long as the trust owns the assets, they cannot be seized by Medicaid to reimburse the state for long-term care costs.
Special Needs Trusts
A Special Needs Trust (SNT) is created to benefit a person with special needs without putting their eligibility for government benefits at risk. There are different types of SNTs. They must be created with the assets of a third party, not with the assets of the SNT beneficiary. The rules for “means-tested” government benefits are strict and require expert assistance to navigate them safely, when seeking to make a gift or leave an inheritance to someone receiving such benefits.
Charitable Trusts
There are different types of charitable trusts. Some provide income to the grantor now and principal to charity later. Others provide income to the charity now, and principal back to loved ones later. Regardless, all charitable trusts benefit charity and provide some tax benefits to the grantors who establish them. They are best for people who would be making charitable contributions anyway, since there are other ways to manage tax liabilities.
Generation-Skipping Trusts
The goal of a Generation-Skipping Trust (GST) is to pass wealth along to a grandchild, great-niece or great-nephew or anyone who is at least 37 ½ years younger than the grantor. In 1976, the generation-skipping transfer tax was created to generate federal taxes paid when assets are in a GST trust and the heir receives more than the allowable generation-skipping estate tax credit allows.
Irrevocable Life Insurance Trust
Commonly, known as an ILIT, this type of trust owns life insurance policies while the insured is alive. The grantor creates and funds the trust with cash. The trustee applies for and owns (as trustee) a life insurance policy on the grantor. When the grantor dies and the life insurance proceeds are paid to the trustee on behalf of the ILIT, the proceeds are then owned by the trust and not part of the grantor’s estate. This lawful maneuver keeps the life insurance proceeds free from potential estate taxes and available to provide “liquidity,” if needed by the grantor’s estate should estate taxes be owed.
Other types of trusts include a testamentary trust created under a last will to administer an inheritance as an alternative to a lump sum inheritance distribution. In addition, there are specialty trusts associated with certain states known for “trust-friendly” laws; credit shelter trusts for estate tax planning, and more.
One characteristic shared by all trusts, however, is the fact that they can be very complicated to legally create and to properly fund. Trust planning is not a “weekend DIY project.” The assistance of an estate planning attorney is essential for the design, implementation, and maintenance of a trust.
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