A Trust is an agreement that one person makes to hold property, real or personal, for the benefit of another. Let's discuss 5 different types of Trusts that can help you protect and control the distribution of your property:
1. Living Trust
One of the factors used to classify trusts is whether they become effective during the settlor’s lifetime or whether they become effective only after the settlor’s death.
A Trust that becomes effective during the settlor’s lifetime is called a "living trust." Most living trusts are created by a written instrument, which can be either a trust agreement or a declaration of trust. Living trusts may avoid probate if they are properly funded during the settlor's lifetime.
2. Testamentary Trusts
A testamentary trust is a Trust created under a Last Will and Testament. The testamentary trust can be modified and is revocable at any time during the lifetime of the person creating the Trust, but becomes irrevocable upon his or her death or incapacity. Unlike a living trust, a testamentary trust does not come into existence until the creator of the trust dies.
3. Special Needs Trust
A special needs trust is a Trust that is established for a person who is receiving government benefits. The special needs trust will provide a source of funds for an individual without disqualifying him or her from government benefits.
If a person is receiving government benefits then, an inheritance, a gift or even the receipt of a sum of money for damages in a personal injury lawsuit, could reduce or eliminate the person's eligibility for such benefits. With a Special Needs Trust, a beneficiary (recipient) can obtain certain luxury items and other benefits without affecting his or her eligibility for any government benefits. Please keep in mind you must consult a qualified estate planning attorney who is well versed on the various government benefits to make sure this Special Needs Trust is set up properly so that you do not unintentionally create an ineligibility for the person receiving the government benefit.
4. Spendthrift Trust
A spendthrift trust is a Trust that includes certain language giving the trustee flexibility to avoid making any distributions to beneficiaries if the distribution is intended to go to a creditor. It also would be included when the trustee has concerns that the distribution would be wasted by the beneficiary. Some family members, such as a spouse or a child are just not "good" with financial management. Incorporating a Trust for such a beneficiary in your Will can protect the assets from the beneficiary’s spendthrift habits.
5. Irrevocable Life Insurance Trust
An irrevocable life insurance trust (also known as an "ILIT") is an irrevocable trust created for the main purpose of owning a life insurance policy. The ILIT is an agreement created for the benefit of the named beneficiaries. This Trust, like other irrevocable trusts, cannot be amended, terminated, revoked or changed after it is created. Once the settlor contributes property to the Trust, he or she cannot reclaim ownership of the property or change the terms of the Trust. The purpose of this Trust is so your life insurance policy is not included in your estate upon your death for purposes of estate tax.
These types of Trusts will allow you to put conditions on how and when your assets will be distributed upon your death. They allow you to reduce your estate and gift taxes and distribute assets to your heirs without the delay and can also protect your assets from creditors and lawsuits.