A will is an important document to secure a testator’s legacy. However, complications may arise when an estate plan only has a will, such as probate, challenges and estate taxes. A trust can be made to protect an inheritance.
A trust is an arrangement with a grantor and a trustee. A trustee is responsible for managing and distributing trust funds as instructed. Trustees should be aware of their legal options as they consider drafting a trust:
7 types of trusts to add to your estate plan
There are a number of trusts grantors can explore for the benefit of their legacy. Here are seven commonly used trusts:
- Revocable trust: A grantor can create a trust that they can alter or revoke at any time. Transferring assets to a revocable trust can avoid the probate process. A revocable trust can be set up to distribute assets upon death or automatically create an irrevocable trust.
- Irrevocable trust: A grantor can create a trust that provides greater protection against creditors and estate taxes. Unlike a revocable trust, a grantor can not easily change the purpose of an irrevocable trust. If a grantor wishes to make any changes to the irrevocable trust, they may need to seek permission from beneficiaries.
- Special needs trust: A grantor can set up a trust to protect the interests of a beneficiary who receives special needs benefits, such as Social Security Disability benefits or other government-provided health coverage.
- Incentive trust: A grantor can set up a trust to influence how an inheritance is used. An incentive trust can include clauses beneficiaries must meet before they can access funds. For example, a beneficiary may need to be enrolled in college and receive a 3.5 GPA or higher before they can access funds for school supplies, books or student loans.
- Spendthrift trust: A grantor can make a trust as a way to protect an inheritance from misuse. The grantor can limit how often beneficiaries can access funds from a spendthrift trust. This is especially beneficial for beneficiaries who struggle to hold wealth.
- Charitable trust: A grantor can set up a trust for the benefit of charities, nonprofits, private organizations or research groups. Funds in a charitable remainder trust can be donated to charities at a fixed rate. A charitable lead trust may pay a charity for a set amount of time before distributing any remaining assets to the donor or their heirs.
- Pet trust: A grantor can create a trust for the benefit of their pet. Funds in a pet trust can be distributed for the feeding, care, shelter and medical care of their pet.
Those who are thinking about their estate planning needs may need to reach out for legal guidance to learn more about how a trust benefits their legacy.