Are These 5 Types of Trusts Missing from Your Estate Plan?

trusts missing from your estate plan

Despite being the most commonly used estate planning tool, wills have several drawbacks.

Trusts, on the other hand, offer many benefits, such as allowing your loved ones to avoid probate and reducing liability regarding estate taxes. Trusts are highly customizable and give you more control over how your taxable estate is distributed.

Certain trusts may better suit you than others, depending on your unique concerns and your desired beneficiaries. Worried about your beneficiaries squandering their inheritance? There’s a trust for that. Are you making provisions for a loved one with special needs? There’s a trust for that, too.

With so many types of trusts, you may be unsure which one is right for you. You may wish to book a planning session with our knowledgeable estate planning attorney for personalized recommendations and guidance.

5 Types of Trusts to Consider

If you’re creating or updating your estate plan, you may have heard about the importance of trusts. Trusts are versatile estate planning tools that can help protect assets, minimize taxes, and provide for loved ones.

You should consider including five types of trusts in your estate plan.

Spendthrift Trust

Are you concerned about a beneficiary squandering their inheritance? Maybe they’re prone to taking on debt or have shown difficulty with personal finance, and there’s a chance that your legacy will end up in the hands of creditors.

A spendthrift trust can help protect your assets from a beneficiary who may be at risk of squandering their inheritance due to poor financial habits or debt. This type of trust limits their access to funds and allows you to control how and when they receive them, safeguarding your legacy from creditors and other collection agencies.

By structuring the trust this way, the beneficiary receives the assets incrementally and cannot sell them, ensuring that the assets remain protected under the trust.

Incentive Trust

We’ve all heard of the proverbial “trust-fund baby” who doesn’t need to work because their inheritance pays all the bills. An incentive trust discourages this behavior by specifying criteria the beneficiary must meet before releasing funds.

For example, you may wish to specify that a beneficiary must graduate from college before receiving the funds. They’ll be extra motivated with their studies (and far less likely to drop out) knowing there’s a reward at the end.

Like other types of trusts, an incentive trust bypasses the probate process and protects the funds from creditors.

Charitable Trust

Do you want to leave a legacy for a cause or organization near and dear to your heart? A charitable trust allows philanthropists to transfer assets to their favorite organizations while reducing their estate’s tax liability.

There are two charitable trusts: charitable remainder trusts and charitable lead trusts. A charitable remainder annuity trust earmarks remaining assets or income for a charity of your choice, whereas the charitable lead trust designates funds to your chosen charity first and gives any remainder to your beneficiaries.

Charitable trusts are irrevocable, so once yours is operational, you won’t be able to regain ownership of assets. A charitable trust is a big decision you should discuss with a lawyer.

Generation-Skipping Trust

If you’d prefer that your assets pass to your grandchildren, a generation-skipping trust should be a part of your estate plan. This trust can be used as an effective wealth-preservation tool and allows you to bypass estate taxes and the probate process.

Although grandchildren are the most common beneficiaries of generation-skipping trusts, you can also choose generation-skipping trusts to transfer assets to a nephew or mentee. The beneficiary can be anyone at least 37.5 years younger than you, provided they aren’t a surviving spouse or ex-spouse.

Special Needs Trust

If you’re leaving a legacy for a loved one with special needs, you’ll want to consider a special needs trust. While done with the best intentions, enriching your loved one could ultimately be detrimental. To qualify for government benefits such as Supplemental Security Income (SSI), disabled persons must have a net worth of $2,000 or less. This type of trust preserves their eligibility for the government benefits they deserve.

Special needs planning also entails developing a comprehensive care plan for your loved one. Our experienced and compassionate special needs planning attorney can walk you through the process.

Other Types of Trusts

In addition to the five types of trusts outlined above, you might also want to consider one of the following:

  • Asset protection trust — A type of trust that provides protection against creditors and lawsuits.
  • Revocable trust — A type of trust allows you to retain control over your assets during your lifetime and avoid probate upon death.
  • Irrevocable trust — A type of trust that cannot be modified or terminated without the beneficiaries’ consent
  • IRA trusts — A type of trust specifically designed to hold Individual Retirement Accounts (IRAs) for the benefit of your beneficiaries.
  • Dynasty trust A type of trust that allows you to pass on assets to future generations while minimizing estate tax liability.
  • Credit shelter trust — A type of trust designed to take advantage of the estate tax exemption by maximizing the number of assets that can be passed on to beneficiaries tax-free.
  • Irrevocable life insurance trusts — A type of trust specifically designed to hold life insurance policies outside your estate, which can offer estate tax exemption.
  • Blind trust — A type of trust in which the beneficiary has no knowledge or control over the assets in the trust.
  • Bypass trust — A trust designed to “bypass” the surviving spouse’s estate and take advantage of both spouses’ estate tax exemptions. It may offer estate tax exemption, depending on how it is structured.
  • Testamentary trusts — A type of trust created through a will and comes into effect upon the death of the person who created the will.

Estate plans are as unique as the people who create them. When you work with an estate planning attorney, you’ll get personalized advice and guidance.

Don’t Leave Your Estate Plan Incomplete Without a Trust — Contact Us Now

Now that you know the five types of trusts you may be missing from your estate plan, it’s essential to take action and ensure that your plan is complete.

Working with a knowledgeable estate planning law firm like Santa Barbara Estate Planning & Elder Law, you can create a customized plan that addresses your unique needs and goals.

Don’t wait until it’s too late to protect your assets and loved ones. Contact us today to schedule a consultation and take the first step toward peace of mind.

Author Bio

Julianna Malis is the Founder and Managing Partner of Santa Barbara Estate Planning & Elder Law, a Santa Barbara estate planning law firm she founded in 2014. With more than 25 years of experience practicing law, she has dedicated her career to representing clients in a wide range of legal matters, including estate planning, elder law, Medicaid and Medicare planning, probate, and other estate planning areas.

Julianna received her Juris Doctor from the University of the Pacific — McGeorge School of Law and is a member of the California State Bar Association.

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