Many people harbor a misconception about trusts in the estate planning context. They think that trusts are only useful for multimillionaires that have generational wealth. Indeed, high-net-worth individuals use trusts to protect assets and mitigate estate tax exposure.
At the same time, there are other types of trusts that can be useful for ordinary people. Let’s look at some of the ways that you can use a trust to satisfy specific estate planning objectives.
Spendthrift Beneficiary
Let’s say that you have a son who has never been good with money. He has come to you over the years for help when he was in over his head, and at some point, you won’t be around to lend a hand.
This is a source of concern when you’re planning your estate. If you leave him a direct inheritance through the terms of a will, there are no safeguards. He would be free to use the money in any way that he sees fit. Poor decision-making could yield disastrous results in the long term.
Revocable Living Trust
Under these circumstances, you could make your son the beneficiary of a revocable living trust with a spendthrift provision. While you are living, you would have total access to the assets, and you can make changes or dissolve the trust entirely.
Because you maintain incidents of ownership in a legal sense while you are living, the assets would not be protected from creditors. However, after your death, the trust would become irrevocable. The beneficiary would have no direct access to the principal.
At that point, the trustee that you name would administer the trust. Since the beneficiary cannot reach the assets, the same principle applies to their creditors.
Regarding asset distributions, you control the way the assets will be passed down when you draw up the trust. For example, you may instruct the trustee to distribute the earnings that the principal generates for a certain number of years.
Incentive Trust
Another type of trust that can be useful in some situations is the incentive trust. As the name suggests, when you create the trust, you include incentives that the beneficiary must satisfy.
People often use these trusts to guide younger beneficiaries toward higher education. Some will use an incentive trust to foster a work ethic. They allow for a dollar-for-dollar match of money earned by the beneficiary while they are working.
Supplemental Needs Trust
People with disabilities often rely on Medicaid for health insurance and can also qualify for Supplemental Security Income (SSI). These are need-based benefits, so a vastly improved financial profile can cause a loss of eligibility.
You can account for this when you’re planning your estate through the utilization of a supplemental needs trust. These trusts are alternately referred to as special needs trusts.
The way it works is you fund the trust and name a trustee to administer it. From a legal perspective, any adult willing to assume the role can act as a trustee. However, you can alternately use a professional fiduciary like a trust company.
Since the beneficiary never directly owns the assets, benefit eligibility would not be impacted. Under the rules of the programs, the trustee could use those assets to provide goods and services to the beneficiary.
As long as the guidelines are followed correctly, the benefit eligibility will remain intact. After the death of the beneficiary, the remainder would go to a successor that you designate in the trust agreement.
Inheritance Protection
If you have children and you are getting remarried, you have multilayered responsibilities. You have to consider the well-being of your new spouse, but you may want to preserve your children’s inheritances.
A qualified terminable interest property (QTIP) trust can provide the best of both worlds. To implement this strategy, you make your spouse the initial beneficiary, and your children would be the successor beneficiaries.
Once again, you name an individual or entity to assume the role of trustee. Since there are multiple interested parties, you have to take conflicts of interest into account.
Assuming you predecease your spouse, they would receive distributions of the trust’s earnings going forward. They would not be able to reach the principal directly, but you could give the trustee the discretionary power to distribute portions of the principal.
Your surviving spouse would have no ability to change the terms of the trust in any way. After their death, your children will inherit the assets that remain in the trust.
Testamentary Trust
A testamentary trust is a trust that is contained within a will. If you are planning your estate as the parent of a dependent child, you may benefit from this type of trust.
Since children cannot handle their own funds, you have to account for this administrative reality. A testamentary trust can be the solution. After your death, the trust would go into effect, and the trustee that you named would manage the assets on behalf of the child.
Take Action Today!
As you can see, there are many different ways to proceed when you plan your estate. This is one of the reasons why you should work with an attorney to put a plan in place. A legal professional will be aware of the options that are available to address specific objectives.
When you engage our firm, you will go forward with a tailor-made plan that is ideal for you and your family. As time goes on, we will always be available to make revisions whenever things change.
If you call 504-831-2348, you can schedule a consultation at our Metairie or Covington, LA, estate planning office. If you would rather send us a message, fill out our contact form, and we will get back to you as soon as possible.
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