When you create a trust, you are creating an asset. You are utilizing resources, in order to protect the financial interests of yourself or your designated loved ones. Depending on the type of trust, you can find yourself shaping your estate and your future.
There are two basic types of trusts: living trusts and testamentary trusts, according to CNN. A living trust (also referred to as a revocable trust) is set up during a person’s lifetime, and a testamentary trust is set up within a will and established only after the person’s death when the will goes into effect.
According to the Department of the Treasury, there are three things that every trust has to have, in order to be a trust. They need the person creating the trust (also referred to as a grantor, trustor, settlor, or maker), the party the grantor names in the trust to care for and manage the trust property (also referred to as the trustee), and the party for whose benefit the trust was created (also referred to as the beneficiary).
Revocable and irrevocable trusts
Whether you are the grantor, the trustee, or the beneficiary, you need to be aware of the difference between a revocable and irrevocable living trust. A revocable living trust is written to permit you to revoke or amend them whenever you wish to do so, according to the American Bar Association.
This is in stark contrast to an irrevocable living trust, which cannot be revoked or changed. Irrevocable living trusts are exclusively done to produce specific tax or asset protection results. The grantor cannot act as a trustee when forming an irrevocable living trust.
Revocable living trusts are more common, and two of the most common purposes of a revocable living trust are to avoid probate of the assets and to plan for mental instability, according to The Balance.
Social security and trusts
Depending on the type of trusts, it can affect your supplemental security income benefits. According to the Social Security Administration, if you used your assets to establish a trust on or after January 1, 2000, the trust will generally count as your resource for your supplemental security income.
For those who have a revocable living trust, the whole trust is considered to be your resource, while in the case of those who have an irrevocable living trust, if there are any circumstances where payment could be made to you or for your benefit, the portion of the trust from which payment could be made, is your resource.
Other types of trusts
There are other types of trusts that are created for specific purposes. Credit shelter trusts (also referred to as a bypass trust or a family trust) includes writing a will bequeathing an amount to the trust up to, but not exceeding the estate tax exemption. From there, you pass the rest of your estate to your spouse tax-free forever, regardless of growth.
Qualified personal residence trusts can remove the value of your home or vacation home from your estate and become useful if your home is to appreciate in value. Generation-skipping trusts (also referred to as dynasty trusts) allow you to transfer a substantial amount tax-free to beneficiaries who are at least two generations younger.
Qualified terminable interest property trusts are for those that are part of a family that has included divorces, remarriages, and stepchildren and allows the grantor to direct assets to specific relatives. The surviving spouse receives income from the trust, and the specified beneficiaries will get the remainder after the surviving spouse dies.
Irrevocable life insurance trusts have the ability to remove your life insurance from your taxable estate, while helping to pay estate costs and provide heirs with cash. However, by removing the policy from your estate, you surrender ownership rights, disallowing you to borrow against the home or change beneficiaries. This also means the proceeds of the policy can be used to pay any estate costs after you die, providing your beneficiaries with tax-free income.
In addition to what type of trust you may create and how it may interact with your supplemental security income benefits, you also have to navigate how state law may affect your trust.
This may require you to entrust your needs to an attorney who knows the ins and outs of estate law and can guide you through the process. Contact Cordell Planning Partners, and set up your free one-hour consultation.