This post is written by our guest blogger and referral partner, Andrea R. Capita, from Capita Law, LLC.
September 8, 2023
On a regular basis, I receive many calls from people inquiring as to whether or not they need a trust as part of their estate plan. The answer to this question depends on the caller’s goals for their estate planning. Are they planning for the cost of long-term care? Do they have a disabled family member they want to provide for? Do they have reasons to avoid probate when they pass away? There are many types of trusts available, and creating the right estate plan can seem daunting. Here is a summary of the common trusts that I prepare for clients and their usefulness.
- Special Needs Trust. A special needs trust allows you to provide money or property for the benefit of someone with special needs without disqualifying them from receiving governmental benefits. Federal laws allow special needs beneficiaries to receive certain types of benefits from a carefully crafted trust without defeating eligibility for government benefits.
- Qualified Terminable Interest Property Trust. A qualified terminable interest property trust initially provides income to the surviving spouse and, upon the surviving spouse’s death, the remaining money and property are distributed to other named beneficiaries, while still allowing the trust to qualify for the unlimited marital deduction. These are commonly used in second marriage situations and to maximize estate and generation-skipping tax exemptions and tax planning flexibility.
- Testamentary Trust. A testamentary trust is a trust created in a will. This type of trust is created upon the individual’s death and is commonly used to protect the money and property on behalf of a beneficiary as opposed to transferring the money and property to the beneficiary outright. It can be used when a beneficiary is too young to manage their own money or property, has medical or drug issues, or may be incapable of responsibly managing their own money. The trust can also provide asset protection from lawsuits, or a claim by a divorcing spouse brought against the beneficiary. Unlike a revocable living trust or an irrevocable trust, where property should be transferred into a trust during the trust maker’s lifetime to work properly and avoid probate, testamentary trusts require the sometimes lengthy and expensive probate process before the trust is created.
- Asset Protection Trust. This type of trust is used for long-term care asset protection planning while reserving the trustmaker’s exclusive right to reside in the home, right to the trust’s income, and preserving the client’s capital gains tax advantages. To protect the assets from the cost of long-term care, the trust must be irrevocable to the trust maker, created more than five (5) years before either trust maker needs government assistance to pay for his or her long-term care, and must include specific provisions to reserve the trust maker’s capital gains tax benefits.
- Living Trust. These trusts are also referred to as revocable trusts and are used to avoid probate upon the death of the trustmaker(s). This type of trust does not provide asset protection planning but is ideal for clients who own real estate in more than one state or clients who have a complex plan for how their assets should be distributed after his or her death.