Which Trust Fund is Right for Me?

Last week, Michna Law Group discussed the "Basics of a Trust Fund". In that article, we covered the two primary types of trust funds: a living trust and an after-death trust. As a quick recap, here are the differences between the two:

Living (Inter-Vivos) Trust

• Activated during grantor's lifetime
• Assets distributed to beneficiaries upon grantor's death
• Revocable or irrevocable
• Avoids probate

After-Death (Testamentary) Trust

• Activated after grantor's death
• Considered part of a will
• Reviewed in probate court prior to asset distribution
• Revocable during grantor's lifetime

In addition to inter-vivos and testamentary trusts, there are numerous other types. Today, we will examine the following trusts:

• Asset Protection
• Charitable
• Constructive
• Special Needs
• Spendthrift
• Tax By-Pass
• Totten

Asset Protection Trusts

Often (but not always) set up in a foreign market, asset protection trusts are created for the purpose of protecting assets against the threat of creditors. To ensure that the grantor is not a current benefit, these trusts are typically set for a number of years. After the trust's term is up, the assets can be returned to the grantor, assuming that the grantor isn't under attack by creditors.

Charitable Trusts

Set up to benefit the general public or a specific charity, charitable trusts can also be used as a strategic tool for financial planning. This trust is typically set up as part of an estate plan, permitting the avoidance of estate or gift taxes. Not only does this offer tax benefits for the grantor and his/her heirs, the grantor's altruistic gesture is typically recognized by the charity of choice. While these trusts are primarily irrevocable, grantors can establish a revocable version until his/her death. 

Constructive Trust

The only "implied trust" on this list, constructive trusts don't require a formal establishment. Instead, if a person's intention is to distribute assets to another, a court may recognize that a trust was, in fact, created.

Special Needs Trust

A special needs trust is created mainly to provide the beneficiary with additional assets, such as an inheritance, while simultaneously maintaining said beneficiary's eligibility for government benefits. In many instances, this is a necessity because receiving a large sum of money can disqualify the beneficiary from government benefits. Because the beneficiary receives government benefits, he/she can not act as trustee. However, the beneficiary can be the grantor of the trust.

Spendthrift Trust

Similar to an asset protection trust, a spendthrift trust is set up to protect the beneficiary from having to give assets in the trust away to creditors. Once the trust's assets are distributed to the beneficiary, they are no longer protected against creditors.

Tax By-Pass Trust

A tax-by-pass trust is a legal way to avoid federal taxes. The purpose of this trust is for a spouse to leave the other spouse and their children with tax-free assets, Without this type of trust, assets are tax-free for the children up to a certain legal limit. Any money over that limit can be heavily taxed by the federal government, leaving children to pay thousands of dollars in taxes.

Totten Trust

The final type of trust that we're going cover is a totten trust. This trust provides many of the same benefits as an inter-vivos trust, including its revocable nature and the allowance of assets to avoid probate upon distribution. That said, totten trusts can't be used with a property. Alternatively, totten trusts are primarily used for financial accounts and securities.

Summary

As you can see, there is a type of trust for virtually any circumstance. The wide variety allows people to structure their assets in a way that's most beneficial for them. To have a conversation with a trust lawyer, please contact Michna Law Group by phone at 847.446.4600 or by email at BJM@MichnaLaw.com.