What Are the Different Types of Trusts and Which One is Right for Me?
Having a simple will is an essential part of the estate planning process, but sophisticated plans also need to include one or more well-structured trusts. Sifting through the different types of trusts and trying to decipher which one is the best fit for you and your loved ones can be overwhelming.
In this article, our team of experienced wills and trust attorneys at Levin Law Group in New York and New Jersey is outlining some common types of trusts to help you process which one may be right for you. The article is not comprehensive in scope and is meant to be a simplified introduction to the subject of trusts in New York.
What Is a Trust?
The Internal Revenue Service defines a trust as a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another. The property at stake may include real estate, stocks and bonds, cash, a business, or other valuables such as vehicles or jewelry.
A trust includes a grantor, which is the person who creates the trust and has legal authority to transfer property into it.
A trustee refers to the person or organization who administers property or assets for the benefit of a third party by holding onto the property impermanently and without having direct ownership.
Essentially, the trustee manages the assets before they are ultimately given to the beneficiary — the individual who benefits from the trust. More than one person can be a beneficiary of the same trust, and each individual can even be entitled to varying amounts of the assets.
What Types of Trusts Exist?
When it comes to trusts, there are two basic kinds: testamentary and living.
A testamentary trust is established by a will and goes into effect after a person dies. It can be a good option for people with young children or grandchildren, as these trusts can protect assets from legal action or potentially irresponsible decisions by beneficiaries. These trusts can be a good choice if you have assets you’d like to preserve for children from a previous marriage.
They are also often recommended for ensuring beneficiaries with special needs will be cared for. Testamentary trusts do not require beneficiaries to pay taxes on the income that is distributed from the trust. However, income taxes must be paid on undistributed income.
The second basic kind of trust is a living trust, which is set up and exists while someone is alive as well as after they die. There are two basic types of living trusts: revocable and irrevocable.
Revocable Versus Irrevocable Trusts
A revocable living trust allows the individual who owns it to maintain control of the assets, status, and terms.
Revocable trusts can be advantageous if you’re interested in ensuring your property remains available for your benefit in the event you become physically or mentally incapable of managing your financial affairs. Another plus with a revocable trust is that the assets can be immediately available to your successor trustee at the time of your death — which can be crucial for things like paying estate taxes or debts.
Conversely, an irrevocable trust is set up so assets are not owned by the person. No changes can be made to the terms unless an agreement is made with the beneficiary or beneficiaries. An irrevocable trust offers an estate tax exemption, as property transferred to an irrevocable living trust does not count toward the overall gross value of an estate.
This makes it a good option for parents interested in gifting a principal residence to their descendants under less burdensome tax rules. An irrevocable trust may also be used to deplete an individual’s property to secure eligibility for government benefits like Social Security income and Medicaid.
An Abundance of Options
Looking a level deeper at trusts, you will find an abundance of options to fit your needs and those of your beneficiaries. Here are just a few to consider:
Charitable Trust
A charitable trust enables you to give assets to a designated tax-exempt charitable organization or nonprofit group. It offers certain tax benefits to help minimize what you may owe to the government. This type of trust is a rewarding way to make an impact toward a cause you care about.
A wills and trust attorney can help you to also structure your charitable trust to provide a dependable income stream to you and your beneficiary for a designated period of time if that would be ideal for your will and estate planning.
Life Insurance Trust
A life insurance trust is set up when someone wants to transfer the ownership of your term or whole life insurance policy to a trust. The trust then owns the insurance policy, with the trustee managing its benefits. When the insured individual passes away, the death benefit is paid to the trust and the trustee distributes funds according to the terms of the legal trust document.
Medicaid Asset Protection Trust (MAPT)
A Medicaid Asset Protection Trust (MAPT) is a type of irrevocable trust established in order to assist individuals over the Medicaid Asset limit to qualify for Medicaid.
Pooled Income Trust
A Pooled Income Trust is a type of trust established in order to assist individuals over the Medicaid Income limit to qualify for Medicaid. In order to be eligible for Medicaid, an applicant must not earn more than a certain amount of income per month (the limit changes from time to time). If the applicant makes even $1 more than the limit, the applicant is not eligible for Medicaid. However, by setting up a Pooled Income Trust, the applicant can qualify for Medicaid.
A Pooled Income Trust creates a separate account managed by a charitable organization. The excess income of the individual is transferred to that separate account each month. The individual can then direct the charitable organization that manages the account to pay certain allowable expenses with the funds in that account.
Special Needs Trust
A special needs trust is a legal plan set up to allow a person who is physically or mentally ill or chronically disabled to have access to funding without losing access to the benefits offered by public assistance programs.
Do I Need an Attorney to Draft a Living Trust in New York?
Legally, you do not need an attorney to draft a living trust. However, in order for a living trust to be legally valid, it has to follow the exact specifications of the law. Failure to follow the exact legal requirements can result in legal disputes and challenges or in the living trust being completely voided.
Wills and Trust Law Firm in New York
As you craft an estate plan, speaking with an ethical financial advisor and wills and trust attorney before making a decision is important. Your choices can create significant tax implications.
A wills and trust attorney at Levin Law Group in New York can help you navigate the process of choosing and creating the right trust for you and your beneficiaries. Every family is different, so there is no one-size-fits-all when it comes to trusts. Contact Levin Law Group today online or call us at (800) 517-5240.