You have decided to consider creating a Trust. Generally people decide on this course to help ensure financial stability to themselves and their loved ones. When you begin the process with your lawyer you will need to determine what kind of trust meets your needs. You as the creator of the Trust are the “settlor”, “Trust maker” or “Grantor”. Depending on the type of Trust, “Revocable” or “Irrevocable” you will either be the “trustee” or you will designate a “trustee” or several “trustees” to administer the distribution of the assets of the Trust. The Trustee administers the assets for the benefit of another person or group of people (“beneficiary” or “beneficiaries”).
There are several different types of Trusts. Primarily, there is a “Revocable” and an “Irrevocable” trust.
A Trust that can be modified by the grantor is called a Revocable trust. During the life of a Revocable trust, income earned is distributed to the grantor. Only after the grantor dies does property transfer to the beneficiaries of the trust. Revocable trusts also have a few other benefits. If you were to choose to act in the role of “Trustee” you would retain control over the assets of the Trust. A Revocable Trust can help you avoid the lengthy and public probate process that is required for a will.
An Irrevocable Trust differs from a Revocable Trust in that do exercise control of the trust or retain ownership of the assets placed into the Trust. Once the trust is created, the Trust creator no longer legally owns the assets, or control how the assets are distributed. Therefore, the Trust maker gives up the ability and need to later modify the trust and can only be terminated or modified under the permission of the beneficiary.
Additionally, the Irrevocable trust offers the benefit of asset protection against creditors. What this means is, since the assets are no longer property of the Trust Maker, a creditor cannot sue the trustees or beneficiaries, or satisfy debt of the Trust Maker. There are many different types of Irrevocable Trusts.
There are several types of Irrevocable trusts listed that will help you address these questions and concerns:
- Irrevocable life insurance trusts (ILIT). This type of trust is often used to set aside funds for estate taxes.
- Grantor retained annuity trusts (GRATs) and qualified personal residence trusts (QPRTs). These trusts are only intended to last a certain length of time. GRATS are a common way for people to minimize taxes on financial gifts to their beneficiaries. QPRT’s are another way to transfer assets to beneficiaries through real estate.
- Charitable remainder annuity trusts. In this type of trust, your beneficiaries will receive the initial income, then a charity of your choosing receives the remaining assets. This is a great choice if you have a philanthropist mind. You can still make positive impact and change the world, even after your death.
- Special needs trusts. This trust is often set up to provide for individuals who have a disability and are eligible for government benefits.
- Self-settled trusts (i.e. domestic asset protections trusts). This type of trust is created to protect assets from future creditors.
- Generation skipping trusts (GSTs). In some cases, this type of trust is used for tax reasons as well. This type of trust allows you to bypass estate taxes by designating assets to your grandchildren instead of your children.
- Irrevocable income-only trust (IIOTs). This type of living trust typically used for Medicaid planning. It designates assets directly to the beneficiaries, so that they are not being sold to pay for nursing home or other long-term care expenses.
Overall, when choosing a type of Irrevocable trust, you should consider asking yourself these 3 questions:
- What is the Main Reason why you are trying to set up a trust?
- Do you have any specific tax considerations? For example, if you are interested in paying Gift tax, you want to figure out if you’re comfortable paying it up front if it means avoiding estate taxes later on.
- Will you need a trust that helps shield your assets from creditors?
After writing down the questions and your answers to them, you can call your lawyer at Tramontozzi Law Offices for a meeting to discuss the next steps.
Understanding which type of trust you need can seem like a difficult process. However, this process can be made easier by taking the time carefully consider you and your family’s priorities. You can start by simply writing down what your values are and how you see your assets being cared for. You can also write a list of values and prioritize them according to what’s most important regarding your assets and estate. Visit with your tax and law advisors frequently for help and verification in the direction you would like to go.
The Lawyers at Tramontozzi Law Offices are here to help you. Call us today at 781.665.0099.