Types of Trusts

When choosing a trust, many people opt for a basic revocable living trust that distributes property, avoids probate, and can provide for property management if you become incapacitated. This type of living trust is often a good choice because it is common and relatively inexpensive to make.

However, variations on revocable living trusts can address specific estate planning goals, like:

• making a shared plan for co-owned property
• leaving money to someone who cannot manage their own finances
• providing for an adult child with special needs, or
• reducing the possibility of paying estate taxes.

You can often address such circumstances by adding features to a basic revocable living trust, but more complicated situations require more complex trusts.

Joint Living Trusts

A joint living trust is a trust made by two or more people and it usually includes property that the grantors co-own. This type of trust prevents each owner from having to make a separate trust for their portion of the shared property. In the trust, each grantor can leave their share to any beneficiary, but they can also leave it to the other owners. Grantors can also include individually owned property.

Married couples often use joint trusts because they often have a lot of shared property, but non-married couples and other types of co-owners can make joint trusts as well.

When you make a living trust with WillMaker, one of the first decisions you'll make is whether to make an individual or shared trust, and WillMaker gives you lots of information to help you make that decision.

Property Management Trusts

Most people are content to leave their property to their survivors outright, without trying to control what they do with it. However, in many common circumstances, trust makers want the terms of their trust to restrict how or when beneficiaries can use trust property. For example, it makes sense for trusts to put restrictions on gifts when the beneficiaries are children or young adults, adults who cannot manage their own finances, or people who receive disability benefits.

Trusts that Benefit Children and Young Adults

An adult must manage any property you leave to minor children—those under age 18. When you leave property to minors in your living trust, you can create a subtrust within your trust that describes who should manage the property (usually the successor trustee of your trust), how the property can be used (for example, for emergencies or education), and when the child should receive the property outright.

The law does not dictate the age at which a child must receive their property outright, nor does it restrict your ability provide property management for children who are no longer minors. So, while trust makers must provide property management for beneficiaries who are legally minors, many trusts take advantage of the option to provide property management for young people well into their twenties or even thirties. You can tailor the terms of property management based on the kind of property it is, the probable needs of the young person, and how well you think they might be able to manage the property on their own.

Spendthrift Trusts

Some beneficiaries may not be able to handle their finances, regardless of how old they get. They might have frivolous spending habits or difficult circumstances that prevent them from making wise decisions with their money, such as an addiction or an untrustworthy partner. If you want to leave a substantial amount of property to someone who might not be able to make good use of it, you can create a "spendthrift trust" that names a trustee to control how and when the beneficiary receives trust funds. Significantly, because the beneficiary never owns or controls trust funds, a spendthrift trust can protect trust assets from the beneficiary's creditors.

Special Needs Trusts

You can use a "special needs trust" (SNT) to provide for people with disabilities. It can be a good idea to create an SNT to provide property management for anyone with a disability who cannot manage money without help. However, the most prevalent reason to make an SNT is to protect the beneficiary's eligibility for government disability benefits—a vital protection for anyone with a disability who receives financial support from the government, not just for those who need help managing their finances.

Here's the issue with disability benefits: To receive disability benefits, a person must show that they have a limited amount of money, no more than a few thousand dollars. If they exceed that limit, the government reduces or eliminates their benefits. This cut-off rule creates real barriers for people with disabilities who want to create comfortable lives for themselves, beyond what they can achieve with government support alone, and it also restricts a beneficiary's ability to receive financial support from their friends and family. There are some workarounds, however, one of which is the SNT.

The type of SNT discussed here is a "third-party special needs trust." These are trusts set up by someone other than the person with special needs. Anyone who wants to help financially support a person with a disability can create an SNT for that person's benefit. In a third-party SNT, the trustee uses trust funds to buy certain goods or services for the person with the disability. Because the beneficiary never owns any of the property transferred into the trust, the value of trust property does not count against eligibility for government benefits. However, strict rules govern the kinds of things the trustee can pay for, and the trustee must understand and carefully follow these rules. Because these rules are both complex and critical, you should get expert help making or managing a special needs trust. You can learn more about this kind of trust in Special Needs Trusts: Protect Your Child's Financial Future, by Kevin Urbatsch and Jessica Farinas Jones (Nolo).

After someone creates a special needs trust, anyone but the beneficiary can contribute to it. So, if you're the one to set up an SNT, you can ask others to leave gifts to it through their wills or trusts. Likewise, if the person you want to support already has an SNT set up for their benefit, you don't have to (and probably shouldn't) create another one. Instead, you can use your will or living trust to leave gifts to the already-existing SNT. If this is your plan, contact the trust's trustee to find out what kinds of gifts would be most helpful and how best to phrase your bequest.

Discretionary Trusts

You can use a "discretionary trust" (sometimes called a "sprinkling trust") to give your successor trustee authority to decide who gets what from your trust property. Discretionary trusts work well as a family trust when the children have varying needs that make it hard to know in advance who will most need an inheritance.

EXAMPLE: Jenny and Kumar are teachers who have three teenage children. Two of their kids are doing well in school and hope to go to college on academic scholarships—their firstborn expects to go to medical school and become a heart surgeon, and the middle child wants to study history. The third child is a musician who has struggled academically but is in an up-and-coming band that hopes (and might actually have a chance) to make it big. Jenny and Kumar cannot know how the next few years will play out. Will their first child drown in student loans or become a wealthy surgeon? Will the middle child struggle to raise a family on an academic salary, or will they change their mind and choose a more lucrative career? Will the third child be rich and famous or end up working low-paying jobs and struggling to make ends meet? Considering these circumstances, Jenny and Kumar are certain that some of their children will need more inheritance than others. Instead of trying to predict the future, they make a discretionary trust that gives Kumar's brother Dhruv the authority as trustee to determine how much of the family inheritance each child will receive. In the trust, they give Dhruv guidelines for an equitable distribution, but they make it clear that he should use trust funds in any proportion if some of their children need help more than others.

Discretionary trusts work best when the trust makers and the beneficiaries share a common understanding of the trust's purpose. Everyone involved should also have complete faith in the successor trustee's ability to make fair decisions. In the example above, both Jenny and Kumar should explain their goals to their children so that the children do not expect to get an exact third of their parents' estates. Before settling on this plan, Jenny and Kumar should also feel confident that the children will respect and abide by Dhruv's decisions so that he doesn't have to deal with intra-family conflict while administering the trust.

Marital Trusts for Blended Families

In many second or subsequent marriages, one or both spouses might feel conflicted about estate planning. On one hand, a surviving spouse might need the income from, or the use of, the other spouse's property in order to live comfortably. On the other hand, either spouse might want to provide an inheritance for children from a former marriage or relationship. This situation becomes even more complicated when a current spouse and children from a former marriage don't get along well.

A marital property control trust can balance the interests and needs of all concerned, by providing for the surviving spouse while also preserving an inheritance of children from prior marriages. When one spouse dies, the trust gives the surviving spouse some use of or income from the trust property, then leaves the property outright to children from a prior marriage when the surviving spouse dies.

Trusts like these can be tricky to set up, and you'll need help from an experienced attorney to ensure that your family trust reflects its needs.

AB Trusts

An AB "bypass" trust works similarly to a marital trust. However, an AB trust focuses on reducing estate taxes, rather than on the division of property between the surviving spouse and the final beneficiaries. In both types of trusts, the surviving spouse has rights to trust property that will eventually go to the final beneficiaries. But an AB trust usually grants the surviving spouse the maximum rights allowed under IRS rules to use trust property. In contrast, a marital property control trust aims to protect the trust principal, so that most of it remains for the final beneficiaries when the surviving spouse dies.

AB trusts aren't as popular as they once were because most people don't need to worry about estate taxes. Only estates worth over $13.99 million are subject to federal estate taxes, and married couples can combine their exemptions. So, an AB trust does not help with federal estate taxes if your estate is smaller than that. That said, a few states also have estate taxes with significantly lower exemptions. In those states, AB trusts can still be useful, particularly for residents of Massachusetts and Oregon, which have $2 million and $1 million exemptions, respectively.

Your Trust Options

If you're wondering which type of trust to make, consider talking it over with a lawyer. An experienced attorney can assess your situation and recommend a trust that will best suit your needs. On the other hand, if you know that a simple probate-avoidance trust is what you need, you can start the process of making a living trust, either by yourself or with the help of an attorney.

You can see examples of living trusts on WillMaker.com.