In planning your estate, trusts are one of the most powerful tools at your disposal to decide exactly how your wealth will not only be distributed to but also used by your heirs and beneficiaries when you pass on. Used properly, trusts make it clear beyond a shadow of a doubt where your wealth will go, when it becomes accessible to your beneficiaries, and even what your beneficiaries are allowed to do with it when they receive it.
However, there are many different types of trusts for estate planning, and while they all serve the purpose of keeping your assets out of lengthy and contentious probate processes and providing support for your family, different trusts have their own advantages—and disadvantages—and the wrong choice can cause more problems than they solve.
Join the estate lawyers at MHPS in exploring and understanding trusts and their benefits for estate planning—specifically, three types of trusts with their own unique use cases: revocable, irrevocable, and special needs trusts.
Types of Trusts Explained: Revocable, Irrevocable, and Special Needs Trusts
There are many different types of trusts you can use to plan your estate, and very few of them are one-size-fits-all. The larger your estate and the more diverse your beneficiaries’ needs, the more likely you are to need different trusts to contain and distribute different assets upon your passing.
Revocable Trusts
Revocable trusts, also known as living trusts, can be modified, revoked, or terminated by the creator at any time during your lifetime. If you place any assets into a revocable trust, you still have significant control over them and can adjust the terms of the trust or move assets into or out of it at any time.
The flexibility you enjoy from using these trusts for estate planning makes it easy to keep your estate up-to-date and reflective of changing family or economic circumstances while ensuring your assets transfer seamlessly upon your passing without passing through probate. However, all of the assets you place in a revocable trust still count as part of your estate for tax and creditor purposes, which makes revocable trusts ill-suited for minimizing your estate’s tax exposure.
Applications of revocable trusts in your estate plan include:
- Avoiding sending your assets through probate on their way to your beneficiaries
- Naming a successor trustee to manage your assets if you become incapacitated in the future
- Providing for a blended family
- Preventing complex probate proceedings for real estate properties in multiple states
- Distributing assets in specific ways, such as through periodic payments instead of a lump sum
If you do hope to use your trusts to protect your wealth from taxation or creditors, though, irrevocable trusts are a more appropriate option for your estate.
Irrevocable Trusts
As the name suggests, irrevocable trusts, unlike revocable trusts, can’t be altered or terminated, even by their creator, except under specific circumstances or with court approval. Also, unlike revocable trusts, the assets you place inside these trusts are no longer owned by you, which means they are protected from creditors and insulated from certain estate taxes.
High-net-worth individuals seeking to minimize their taxes with trusts typically rely on this type of trust. By putting assets into an irrevocable trust and removing them from your estate, you shrink the size of your estate subject to taxes upon your passing and minimize your tax exposure. Since contributions to irrevocable trusts are considered gifts, they may also be eligible for gift tax exclusions or deductions.
Because irrevocable trusts separate your assets from your personal estate, creditors cannot reach them to satisfy any debts you may have. You can also use irrevocable trusts to protect your beneficiaries from creditors by including a spendthrift provision, which prevents them from using the assets you distribute to them as collateral or having those assets seized to satisfy their debts.
These trusts can also be used for:
- Including charitable giving as part of your estate plan
- Removing life insurance proceeds from your taxable estate
- Protecting assets from counting for Medicaid eligibility
- Creating trusts that skip generations to minimize taxes
Special Needs Trusts
The intersection of trusts and government benefits is a thorny issue. If you provide for a family member who has special needs, it’s understandable to want to plan your estate in such a way that they can continue to receive financial support even after you are no longer around to take care of them.
However, if your beneficiaries include an individual in your family with special needs, providing ongoing financial support for them in your estate plan could render them ineligible for government benefits such as Medicaid or SSI if you don’t use the right type of trust. Say, for example, you leave your family member a gift of $25,000 in your will. When they receive that gift, under Tennessee law, they will no longer qualify for these programs, as well as other programs such as Veterans Aid and Attendance or government housing.
Special needs trusts are the right type of trust in this situation. These trusts set aside and distribute just enough funds to enhance the beneficiary’s quality of life while preserving their access to essential public assistance programs. Since your relative with special needs is not in charge of the trust or how its contents are used, any funds they receive from it do not count toward the income limits for the programs they rely on. Instead, a designated trustee has control over the trust and has a fiduciary duty to use its contents solely in the best interests of the beneficiary.
Special needs trusts can also be used to:
- Manage personal injury settlement funds for a disabled individual
- Safeguard assets for a loved one who may lack the capacity to independently manage their funds
- Allow family members to continue contributing to the trust and fund the beneficiary’s care
Choose the Right Trust for Your Wealth Preservation Strategies with MHPS
The right choice of trusts makes all the difference in your estate planning. How you use trusts to protect your assets can insulate your assets from taxes so your beneficiaries get their full value, keep your wealth within your family, and provide ongoing support for your most vulnerable family members in your absence.
On the other hand, the wrong choice can cause confusion about how your assets will be distributed, expose your wealth to over-taxation or loss due to other reasons, or otherwise throw up roadblocks between the wealth you’ve accumulated over your life and the members of your family who need it most.
From minimizing taxes with trusts to keeping inheritance in the family to providing care for special needs, understanding how different trusts work for estate planning is essential for choosing the right type and building an ironclad estate.
With extensive experience helping individuals in Tennessee plan their estates, MHPS Law is here to help you build an estate plan that will preserve your wealth and provide for your family. Contact us today to consult with our estate planning and wealth preservation experts.
To get started, reach out to our legal team for a consultation today.
