“What is a Trust?” Our Firm is often asked that very question by many of our prospective clients. Trusts are an essential tool for estate planning. There are many different types of trusts that can be used in estate planning, each with its unique advantages and disadvantages. A summary of the most common types of trusts used in estate planning is set forth below.
- Revocable Living Trusts. A revocable living trust is a trust that is created during the lifetime of the person creating the trust. It allows the individual to manage their assets during their lifetime and provides for the distribution of their assets after their death. The person who creates the trust retains the right to modify or revoke the trust during their lifetime. A revocable living trust is often used to avoid probate, which can be a lengthy and costly process. A revocable living trust can also shield the dispositive terms of an individual’s estate plan from public record, thereby providing significant benefits to individuals who value privacy and discretion.
- Irrevocable Trusts. An irrevocable trust is a trust that cannot be modified or revoked once it has been created. This type of trust is often used to mitigate estate taxes or to protect assets from creditors. Additionally, the assets held in the an irrevocable trust may potentially be protected from creditors, making it an effective tool for asset protection.
- Testamentary Trusts. A testamentary trust is a trust that is created through a person’s will and becomes effective upon their death. This type of trust is often used to provide for the management and distribution of assets to beneficiaries. It allows the person creating the trust to specify how the assets should be managed and distributed after their death.
- Special Needs Trusts. A special needs trust is a type of trust that is designed to provide for the needs of beneficiaries with disabilities or special needs. This type of trust is often used to protect the beneficiary’s eligibility for government benefits. Since the assets held in a properly established and administered special needs trust are not owned by the beneficiary, those assets are not counted as assets when determining eligibility for government benefits. A special needs trust can be created during the lifetime of an individual, through their will, or through their revocable living trust.
- Charitable Trusts. A charitable trust is a type of trust that is created to benefit a charitable organization or cause. This type of trust can be used to minimize estate taxes or to provide a significant gift to a charitable organization. Two types of charitable trusts include charitable remainder trusts and charitable lead trusts. A charitable remainder trust provides for the distribution of income to the beneficiary during their lifetime or for a set period of time, with the remainder going to a charitable organization. A charitable lead trust provides for the distribution of income to a charitable organization during the beneficiary’s lifetime, with the remainder going to remainder beneficiaries.
- Generation-Skipping Trusts. A generation-skipping trust is a type of trust that is designed to provide for the needs of multiple generations of beneficiaries. This type of trust is often used to mitigate estate taxes by skipping a generation of beneficiaries. The assets held in the trust are distributed to the second generation of beneficiaries, with the remainder going to the third generation of beneficiaries after the second generation has passed away.
In conclusion, there are many different types of trusts that can be used in estate planning. Each type of trust has its unique advantages and disadvantages, and the choice of trust will depend on the individual’s specific needs and goals. It is important to work with an experienced estate planning attorney to ensure that the chosen trust is designed to meet the individual’s goals.
Charlotte-based attorney Christian Perrin is a North Carolina Bar Board Certified Specialist in Estate Planning and Probate Law. Based in Charlotte, Christian and his team serve clients throughout North Carolina and South Carolina.
Disclaimer: This information is intended to stimulate thought and discussion and to provide readers with useful ideas in the area of estate planning. However, this information does not constitute and should not be treated as legal advice or tax advice regarding the use of any particular estate planning technique, device or suggestion. Our law firm does not assume any responsibility for any individual’s reliance on the information presented. Each reader should verify independently all statements made before applying them to a particular fact pattern and should determine independently the legal and tax and other consequences of using any particular device, technique or suggestion.