6 Different Trusts for Particular Needs

If you have a definite vision for what you want to happen to your assets should you become incapacitated or pass away, then you might want to consider adding a trust to your estate plan. 

A trust can be structured to accomplish a variety of specific goals—such as charitable giving or providing for an heir with a disability—and can help minimize taxes and expenses. Unlike wills, which take effect only upon death and must go through the legal process known as probate, trusts can take effect if you are living but incapacitated or after death. And the assets held in trust bypass probate. 

While trusts have a reputation for being expensive, some attorneys offer a basic trust package for a flat fee. That said, the bill can add up quickly if you and your attorney need to spend a lot of time discussing your goals before the trust agreement is drafted. The kind of assets included in the trust and the complexity of the distribution strategy can also affect pricing. So, it makes sense to do some planning beforehand.

The first step is to talk with an estate-planning professional about creating a revocable living trust. Such arrangements are the most common tool used by estate planners and represent a fundamental building block for most estate plans. Once established, you retain control over the assets in the trust: You can buy, sell, and trade assets, as well as move assets into and out of the trust at your discretion.

A revocable trust becomes irrevocable—meaning it can no longer be changed or revoked— when the grantor dies or becomes incapacitated, depending on how the trust is structured.

A revocable trust is often only a beginning, however. Think of a revocable living trust as a foundation on which you can add any number of provisions or supplemental trusts tailored to your specific goals.

Below are some common trusts, according to who might be using them: 

If you've remarried but want to ensure your children from a prior relationship are cared for, a Qualified Terminable Interest Property (QTIP) trust can help. QTIPs are a type of irrevocable trust that can help provide for the living expenses of the surviving spouse. When that spouse dies, the QTIP distributes the remainder of the trust to the children of the original relationship. 

Often these trusts will include provisions that prevent the trust from being excessively drawn down during the surviving spouse's lifetime. When it comes to taxes and QTIPs, estate taxes are deferred until the death of the surviving spouse.

An inheritance can reduce or eliminate the government benefits to which dependents with disabilities may otherwise be entitled. Special-needs trusts can help avoid this pitfall by agreeing to pay only those qualified education, equipment, insurance, and medical expenses not covered by federal or state benefits. The trustee pays such expenses directly so that no money from the trust flows directly to the dependent. 

For example, if government benefits are paying for housing, but the house needs a wheelchair ramp, the trust can cover that. But beware, an improper payment from a special needs trust can jeopardize governmental benefits, so hiring an experienced trustee is crucial. These trusts are are also generally irrevocable.

Leaving a lump sum isn't always wise, especially if a loved one lacks financial know-how or struggles with alcohol, drug, or gambling problems. 

This is where a spendthrift trust—which can be either revocable or irrevocable—comes in. Rather than giving the heir direct access to the trust, this provision appoints a trustee with the discretion to distribute the trust assets, typically based on a set of predetermined guidelines set by the grantor. The trustee may also pay creditors and service providers directly. What's more, because the beneficiary doesn't control the trust, creditors may not be able to claim a right to its assets.

In such cases, an independent trustee may be selected to administer the spendthrift trust, which can help avoid family conflicts. A good trustee can even help educate heirs about budgeting and financial planning.

Charitable trusts fall into two basic categories, depending on when you want the donations to go to the charity or charities of your choice. One is a charitable lead trust, which provides income to a charity for a set number of years, after which the remaining trust assets pass to your heirs.

A charitable remainder trust essentially does the opposite: It provides a payment—at least annually—to the donor while living, with the remainder going to charity upon the donor's death. 

For example, if your estate included assets with sizable taxable gains, you could transfer ownership to a charitable remainder trust and receive an immediate tax deduction. The trust could then sell the appreciated assets without immediately paying capital gains. The trustee could reinvest the proceeds in assets that would pay an income to you for as long as you lived (so long as the trust had assets). Upon your passing, the remaining trust assets would go to charity.

It's important to keep in mind that charitable trusts are irrevocable. Once you transfer your assets, you no longer own them, so be sure to think through all your options before making a final decision.

Attorneys and medical professionals may be especially susceptible to lawsuits. That's why some turn to an irrevocable asset-protection trust, which can help shield their assets from potential litigation. This type of trust names the grantor as the beneficiary, often with a corporate entity serving as trustee. 

By law, the asset protection benefits these trusts bestow are only available if you're not aware of a lawsuit or possible lawsuit against you. Many states—including California, New York, and Texas—prohibit asset-protection trusts, in which case individuals often gain the benefits of a different state's laws by utilizing a corporate trustee in a state that permits them.

The IRS considers the death benefit of individually owned life insurance to be part of the owner's estate, so families with significant assets who also own or are considering purchasing a life insurance policy might benefit from an irrevocable life insurance trust, or ILIT.

If your revocable living trust owns your life insurance policy, the death benefit would be included in the value of your estate. If, on the other hand, an ILIT owns your life insurance policy, it would be considered separate from the main estate and, therefore, not subject to estate taxes. (To be considered separate from the gross estate, existing policies must either be gifted to an ILIT and the insured must live at least three years beyond the gift date, or the policy must be sold to the ILIT.)

A basic understanding of the trust options out there is a good first step, but it is no substitute for consulting with the proper professionals. Be sure to talk with a professional about your family's particular situation to see how a trust might help accomplish your goals.