Common Trusts and Their Purposes
Trusts are powerful options in your estate planning toolbox. However, not all trusts are created equal. Also, certain "types" of trusts are really an umbrella term that could describe several different trusts. For example, there are many different types of "irrevocable" trusts.
Here's a breakdown of the most common types of Trusts and their purposes:
1. Revocable Living Trust:
Purpose: Flexibility and avoiding probate
Key Features:
Created during your lifetime, with assets placed into the trust while you are alive
Revocable so long as you are alive, allowing you to adjust as your needs change
Can include sub-trusts (like the trusts listed below), triggered by certain events (such as the death of a spouse or the age of your child)
Great for married couples to use for Washington estate tax planning
Ensures continuity of ownership in assets, such as a family home
Essential when you own real estate outside of WA so you can avoid probates in multiple states
2. Testamentary Trust:
Purpose: Directs management of assets after death
Key Features:
Irrevocable
Established in your Last Will and Testament and created after your death
All the trust types listed below could be established in someone's Last Will and Testament, falling into this category
3. Special Needs Trust or Supplemental Needs Trust:
Purpose: Provide for a loved one with disabilities without affecting their government benefits
Key Features:
Irrevocable
Can be created in life or in death
Funds are used to supplement the beneficiary's needs above and beyond what their government benefits cover
Strict rules dictate how funds can be used in order to preserve government benefits
4. Children's Trust:
Purpose: Manages assets for a young person while still allowing the trustee to access the funds as needed ("young" is relative, can be for any age, and "maturity" may not be the only reason - see final bullet point below)
Key Features:
Irrevocable
Can be created in life or in death
Ideal for minors or young adults who need financial oversight
Allows funds to be held by the trustee for the young person's benefit, covering health, education, maintenance, and support (which is really almost anything)
Often includes partial distributions along the way (e.g. 25% at age 21, 50% at age 25, and the rest at age 30)
Can also be structured to last the child's lifetime, which can be great for protecting their inheritance from divorces, creditors, or bankruptcies (see #6 below for another benefit of lasting your child's entire life)
5. Disclaimer/Credit Shelter/Bypass Trust - common terms for the same thing:
Purpose: Maximize Washington estate tax exemption while allowing surviving spouse to keep the benefit of the assets
Key Features:
Irrevocable
Created upon death of the first spouse
Can be in your Last Will and Testament or your Revocable Living Trust
Allows both spouses to take advantage of their WA estate tax exemption (currently $2.193M/person)
Must be exercised within 9 months of the first spouse passing
6. Generation Skipping Trust:
Purpose: Preserve family wealth for future generations
Key Features:
Irrevocable
Created in life or in death
Can be in your Last Will and Testament, your Revocable Living Trust, or a standalone trust
Skips taxation at the children's generation (but may trigger the federal generation skipping tax)
Useful for preserving wealth when children are already financially stable and giving them one more dollar will just cause more taxes when they ultimately pass away
These are just a few of the various trust types you can use to ensure your assets are managed efficiently and your beneficiaries are protected.
If you want to learn more, I recommend exploring more about trusts HERE. Or attending one of my seminars. Look for upcoming seminar dates HERE.
Better yet, Schedule Your Consultation, and take the first step toward creating a complete estate plan that protects what matters most to you and your loved ones.
