As part of the year’s end, we are finishing up our series on estate planning and this month we are giving you a basic overview of the different types of trusts you can utilize in your estate planning.
Trusts can be confusing. There are many different kinds for many different reasons and trying to navigate that landscape alone is really rough. That is where we come in. I wanted to break down some common types of trusts and give you an idea of what they are and when in your life you might want to look into these.
First step is “inter vivos” (life-time trust) vs. a testamentary trust (one set up in a will).
A Testamentary Trust is one you set up in your will and it becomes effective when you pass away.
Inter Vivos trusts can be broken into two types of trusts Revocable or Irrevocable.
The best way to describe a Revocable trust is flexible. The grantor can make changes to the provisions of the trust without the permission of the beneficiary. This could include terminating it all together or adding different beneficiaries, among many other things. And the grantor is the one paying the taxes on the income because they retain the assets until their death. The downside to this, if the grantor has debt, this income could be seized to pay it off after they pass on. In addition, Medicaid will count a revocable trust as part of your assets.
On the flip side, in an Irrevocable trust, the grantor cannot make changes to the trust without the beneficiary’s permission. Once everything is transferred, that grantor has no control over anything anymore. It’s out of their hands. And with this type of trust, the beneficiary is responsible for paying the taxes and the income is protected from creditors and cannot be taken to pay the grantor’s debts after they pass on. The main upside to this type of trust is that it is the only kind that protects assets from the costs of Medicaid.
Speaking of Medicaid, there is something called Medicaid Asset Protection Trusts or MAPT. This trust is something to set up early, perhaps as early as your 50s to be safe, due to the 5-year lookback period when it comes to Medicaid. Why would you do this? Because let’s say you need to go into a nursing home. You have assets that are not protected by an irrevocable trust (home, cash, mutual funds….) Medicaid will determine how many months you can pay for your long-term care based on those assets. You will be responsible to pay from your own assets for your care. If the assets are not liquid (like a house), Medicaid will put a lien on your property and your heirs may be required to sell it to satisfy the lien.
Now, let’s talk about some trusts you might want to set up for specific circumstances.
These types of trusts can be created either during your lifetime (inter vivos) or in your will (testamentary).
A basic Testamentary Trust is generally used when you are leaving money to minor children or someone who may not be mature enough to inherit a lot of money. Often called a Spendthrift Trust, it is helpful if you are leaving money to someone that isn’t very wise with their financial habits. Perhaps it’s their age, or some other factor, like a history of making bad investments, but this type of trust allows an independent trustee to manage the money.
A Special Needs Trust is important when you want to make sure a disabled family member can continue to receive their government benefits, like SSI, as well as assets you wish to pass on to them. A trustee will manage the money for the disabled party and funds are used to supplement the government benefits for their living expenses. For instance, if the disabled person needs medical equipment or wants to travel and needs special accommodations, they could use the trust money.
A pot trust or family pot trust is one in which the beneficiaries are children and the trustee has discretion over how to spend money on each child, based on each child’s specific needs. Family assets are generally made available to whatever child needs them.
Please keep in mind that this is just a quick overview of trusts and is intended solely to give you an idea of what types of trusts are available for your needs. There are many types to review and at Sugarman Law, we can help you determine what you might need as you work on your personal estate planning. Contact us so we can evaluate your needs and intentions and craft an estate plan that takes everything into consideration.