How many people have a Will that describes the distribution of their assets after death? In June 2021, Gallup published a survey stating that 46% of Americans had created a last will. It’s essential to explain how you wish your affairs to gets handled after your passing. So, having a written document enables your wellwishers to distribute your assets according to your final wishes.
You can also adopt another manner of creating estate planning documents called a “Trust.” Setting up a Trust isn’t difficult! You can become the grantor/settler and assign a third-party individual/organization as the trustee. This trustee will hold your assets on your behalf to benefit your heirs (called beneficiaries) as per your wishes.
Different Trust types explained
We’ve only explained the central concept behind setting up a Trust. But what does make a Trust better than a Will? After your passing, your last will passes through a legal route called probate, where court-assigned administrators examine its content.
On the other hand, A Trust stays private, its contents secret, and its instructions carried out without the involvement of probate. Trusts, unlike Wills, become effective the minute they are formed, as opposed to after your death. And there’s more than one Trust too!
You may consider it another reason why Trusts are better than Wills. There are several types of trusts to choose from while creating your estate planning documents.
Many people find estate planning a terrible and complicated procedure because they don’t know which option is right. How can you decide which Trust type seems better? The answer involves learning about the differences between these Trust types. When you understand what makes them distinct from each other, you can then pick the best option.
-
Irrevocable Trust:
Unless otherwise indicated, all Trusts in the United States are considered irrevocable. Once they’ve been established, nobody can change/modify them, not even the grantor.
That’s how they protect from creditor claims and unreliable beneficiaries. It also reduces taxes on certain of your assets because they are now part of an irrevocable trust. However, certain Trusts can get altered – even though they’re supposed to be irrevocable – if all the beneficiaries consent.
-
Totten trust:
You might’ve heard of POD (payable-on-death) bank accounts where a beneficiary inherits the funds when the owner dies. That’s precisely how Totten trusts work! People utilize this concept to prevent their wealth from being examined by probate before being passed on to heirs.
Your creditors cannot file a claim against this Trust once it gets transferred to the beneficiary. The word “Totten” is just an English derivative of the German “toten,” meaning “dead,” referring to the owner’s demise.
-
Marital Trust:
A marital or “A” trust constitutes a document benefiting your spouse. When the first spouse dies, the second spouse inherits all of the assets listed in the agreement. And when the second spouse passes away, the designated beneficiaries inherit this wealth, also known as a marital deduction trust.
It’s created to preserve the surviving spouse’s assets. Another variation we call a family trust helps you provide for your family and save their assets when you die.
-
Bypass trust:
Here to mention the second variation of “A” trust is called the “B” Trust. You might’ve heard of it as a method wealthy couples utilize to minimize estate taxes, known as the credit shelter tax.
It lets your spouse benefit from your assets without directly controlling them. In this irrevocable Trust, trustees manage your assets on behalf of the spouse, thereby excluding them from spousal estates. So, when the surviving spouse dies, these assets are transferred to a beneficiary without any estate taxes.
-
QTIP trust:
You may consider it a marital trust with a restrictive structure. Creating qualified terminable interest property trusts (QTIP trusts) enables you to financially support your spouse while also safeguarding the interests of future generations.
People set up these Trusts when they’ve remarried and wish to provide for their children from previous marriages. These Trusts are also irrevocable. So, you can make your spouse the lifetime beneficiary while your children become the remainder beneficiaries.
-
Spendthrift Trust:
A survey shows that 33% of Americans who inherit a fortune “blow it” in a few years. Heirs being ill-prepared to handle your wealth require an irrevocable spendthrift clause added to the Trust. So, the trustee remains in control of your wealth after you die, and your heirs can’t waste it.
Also, this clause protects the money from creditors. So, restricting access to the inheritance prevents your properties from being misused when you’re gone. But your heirs can still benefit from what they’ll inherit.
-
Testamentary Trust:
A testamentary trust becomes irrevocable when you’ve died. Also called the “Trust-under-Will,” this document ensures that beneficiaries access their inheritance only after a specific time has passed.
As the name indicates, it’s created by your last will, so the validity of that “Testament” must be proved in court first. Since you won’t have to maintain this Trust while you’re alive, it’s a cost-effective way to set up a Trust. But it also has limitations other Trust types don’t have (e.g., probation process).
-
Charitable Trust:
This profit allows you to donate your assets to nonprofits while creating a steady source of income for beneficiaries as well. It leaves behind a legacy that provides for one charity or the general population with many taxation benefits.
A charitable lead trust (CLT) allows you to assign particular properties to a charity. At the same time, the rest goes to your beneficiaries. Conversely, a charitable remainder trust (CRT) benefits an organization from its wealth. Still, you can also receive income for some time.
-
Special needs trust:
Suppose there’s a mentally/physically disabled person in your family. In that case, this Trust allows you to provide for this person after your death. It enables a disabled person to remain eligible for benefits such as SSI and Medicaid.
Setting up this Trust doesn’t disqualify the beneficiary – your child, parent, or any sibling – from receiving benefits provided by public assistance programs while catering to that person’s day-to-day needs. This arrangement protects that person financially after your passing.
-
Revocable Trust:
Living trusts can be revocable, but we’re only interested in the former. They’re set up when you’re alive so you can act as the trustee (while nominating a successor) and maintain control of your assets.
Known as “inter-vivos trusts” as well, they have some limitations. They don’t protect from creditor claims, and any income generated by this Trust is taxable. However, it does eliminate probate requirements and helps your dependents finally after you’ve passed on.
Conclusion
Around 50% of Americans aged 55+ haven’t made a Will yet. Whether you’re aged or young, it’s better to decide how you wish your assets to get distributed after death. There’s another popular myth that only wealthy people can set up a Trust.
There are several types of Trusts Americans can set up today. A revocable trust may be altered. But an irrevocable trust cannot. Also, you make a living trust when you’re alive, but a testamentary trust’s created after your passing.
While most Trusts permit you to bypass probate, some Trusts still have to go through this process. So, if you haven’t made a Trust yet, it’s time to contact experts and determine how you want your properties to be handled.