Trusts have a reputation for being complicated legal instruments reserved for the ultra-wealthy. While trusts certainly help high-net-worth families manage wealth, they serve important purposes for people with modest estates too. The key is understanding which type of trust addresses your specific needs and goals.
Our friends at Hirani Law use trusts to solve a wide range of problems from avoiding probate to protecting beneficiaries from their own poor judgment. A trust lawyer can evaluate your situation and recommend trust structures that accomplish your objectives without unnecessary complexity or cost.
Revocable Living Trusts
Revocable living trusts are the most common type we create for clients. You establish the trust during your lifetime, transfer assets into it, and typically serve as your own trustee managing those assets just as you did before.
The main advantage is probate avoidance. Assets held in a revocable living trust transfer to beneficiaries without court supervision, saving time and money. Your family gets access to assets within weeks instead of waiting months or years for probate to conclude.
These trusts also provide privacy. Probate proceedings are public records that anyone can access. Trust administration happens privately without court filings that reveal your assets and beneficiaries to the world.
Revocable living trusts don’t provide asset protection or tax benefits during your lifetime since you maintain complete control. You can modify or dissolve the trust anytime. But they offer excellent tools for managing incapacity and streamlining estate settlement.
Irrevocable Life Insurance Trusts
Life insurance proceeds are generally income tax-free, but they’re included in your taxable estate. For estates approaching or exceeding federal or state estate tax thresholds, this creates substantial tax liability.
An irrevocable life insurance trust (ILIT) owns your life insurance policy outside your taxable estate. According to the Internal Revenue Service, proper ILIT structure removes policy proceeds from estate tax calculation while still providing funds to your family.
ILITs require careful administration. You cannot be the trustee, and you typically make annual gifts to the trust to cover premium payments. The trust must notify beneficiaries of these gifts to qualify for gift tax exclusions.
These trusts make sense primarily for people with estates large enough to face federal or state estate taxes who carry significant life insurance coverage.
Special Needs Trusts
Special needs trusts protect disabled beneficiaries without disqualifying them from government benefits like Supplemental Security Income or Medicaid. These means-tested programs have strict asset and income limits that even modest inheritances can exceed.
A properly structured special needs trust holds assets for the beneficiary’s benefit while maintaining benefit eligibility. Trust funds supplement government benefits by paying for items and services not covered by public programs.
Two main types exist:
- First-party trusts funded with the beneficiary’s own assets
- Third-party trusts funded by someone else, typically parents or grandparents
The rules governing these trusts are technical and mistakes can result in benefit loss. We help families create compliant trusts that genuinely improve quality of life for disabled loved ones.
Spendthrift Trusts
Some beneficiaries lack the maturity, experience, or judgment to manage substantial inheritances wisely. Spendthrift trusts protect beneficiaries from themselves and their creditors by giving a trustee discretion over distributions.
The trust might distribute only income while preserving principal, make distributions at specific ages, or give the trustee complete discretion based on the beneficiary’s needs and circumstances. Creditors generally cannot reach trust assets to satisfy the beneficiary’s debts.
These trusts work well for young adults, beneficiaries with substance abuse issues, those with poor financial judgment, or anyone involved in high-risk professions vulnerable to lawsuits.
The trade-off is reduced flexibility. Once you create an irrevocable spendthrift trust, you cannot easily modify it even if circumstances change.
Charitable Trusts
Charitable trusts combine philanthropy with tax benefits. Charitable remainder trusts provide income to you or your family for a period of years, with remaining assets going to charity. You receive an immediate tax deduction based on the calculated charitable remainder.
Charitable lead trusts work in reverse, providing income to charity for a term of years before assets pass to your family. These trusts can reduce gift and estate taxes while supporting causes you care about.
The tax benefits make these trusts attractive for highly appreciated assets you’d like to sell. Donating appreciated stock or real estate to a charitable remainder trust avoids capital gains tax on the sale while generating income and estate tax deductions.
Choosing The Right Trust Structure
Trust planning isn’t one-size-fits-all. The right approach depends on your assets, family situation, tax concerns, and personal goals. Sometimes a simple revocable living trust handles everything you need. Other situations require multiple trusts working together to accomplish different objectives.
We don’t recommend trusts unless they serve genuine purposes in your estate plan. Adding unnecessary complexity costs money and creates administrative burdens without meaningful benefits.
If you’re considering whether a trust makes sense for your situation, contact our office to discuss your goals and concerns. We’ll explain which trust structures might help and develop a comprehensive estate plan tailored to your family’s needs.