Many people have estate plans that include trusts. Most are traditional revocable or irrevocable trusts that guide a trustee in making distributions of the grantor’s property, usually after death.
Trusts are a great way to accomplish estate planning goals and protect your legacy to provide for future generations. But trusts can also help to protect those future generations in ways that you might not know. Here are some examples of “specialty” trusts that can be useful in very specific situations.
Special Needs Trusts can be created for those family (or non-family) members who have a physical or developmental limitation which would allow them to qualify for some government benefit programs (such as Medicaid). If the trust is set up correctly, the beneficiary can still qualify for the available programs, and the trust is allowed to pay for the supplemental needs of the beneficiary that are not fully funded by such programs. However, if the trust is not drafted properly, the assets may be counted as available to the beneficiary, thus disqualifying him or her from government programs. For that reason, it is crucial to speak with a knowledgeable estate planning attorney about the best way to protect the beneficiary’s eligibility while still providing financial support for future needs.
IRA Trusts are used when people wants their retirement benefits to be paid to a trust after they die, rather than being paid outright to named beneficiaries. Having IRA funds paid into a trust can protect those assets when the IRA owner has a child who is a spendthrift or cannot be trusted with his or her own funds, or if a beneficiary has a drug or alcohol addiction, excessive creditors, or may otherwise not be trusted with the funds outright.
IRA trusts can be even trickier in some ways than special needs trusts, and they must be drafted with attention to detail. An IRA can pay out over the lifetime of the beneficiary, which saves taxes, but to retain that positive tax structure when paying to a trust, certain requirements must be met by the trust. It is necessary to follow the letter of the law exactly, or the trust may not qualify for the stretched out payments, which defeats one of the purposes of the trust. Your estate planning attorney must be aware of these strict requirements and how to meet them, so make sure you do your homework before choosing this type of trust.
Personal Residence Trusts are planning options for people who hold a lot of value in their homes, especially for those people whose estates are above the threshold amount for owing estate taxes. Property owners can place their personal residence into a trust and live there for the remainder of their lives, through various mechanisms built into the trust. This is not the right trust for everyone trying to remove value from their estates, as there are many limitations. You should talk to your estate planning attorney about whether this type of trust may be right for your estate-planning goals.
Life Insurance Trusts are just what they sound like – trusts created to hold a life insurance policy. These are often created by people who expect to pay estate taxes, and the life insurance policy is placed into the trust so that the money from the policy can be used to pay the estate taxes after the grantor dies. Another way to utilize this type of trust is for business owners to purchase life insurance that can be used to buy out a deceased partner or member, rather than having to use company funds. As with the other special types of trusts, there are some specific requirements that must be met in order to satisfy the laws, but this is probably the most common of the different types of trusts listed here.
There are trusts out there to meet a variety of needs for a variety of purposes. Talk to a knowledgeable estate planning attorney to see what options are best for your particular estate planning needs and goals. You may be surprised at the options available to you.