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Estate planning is a great step to give your family peace of mind prior to your passing. Many individuals or couples choose to utilize a will, which is a good option to distribute their assets. However, additional protection can be included in an estate plan, including a trust.
Trusts are legal documents that make the transfer of assets more efficient. When a trust is in place, a third party (trustee) is responsible for distributing the assets or property after your passing. This means that assets placed in the trust will not have to go through probate. Your family’s privacy will be protected and you can rest easy that your ducks are in a row.
When setting up a trust, there are key terms everyone should be familiar with.
- Settlor: this is the person who creates the trust. This person could also be called a trust-maker, trustor or grantor.
- Trustee: this is the person or people who are administrators of the trust. With some trusts, the Settlor is also the trustee until their passing. A successor trustee seamlessly takes over after their passing.
- Beneficiaries: these are recipients of assets listed in the trust. A beneficiary can be one person, multiple people, an organization, or another trust.
Individuals or couples looking to set up a trust have several options to choose from.
Revocable Living Trust
A revocable living trust (or a revocable trust) is one of the most common types of trusts. It allows the Settlors to set out in writing how the assets will be distributed after they die. A wide array of assets can be included in this trust including real estate, bank accounts, investments, and other valuable possessions.
A benefit of a revocable living trust is that after it’s created, it can be altered or even revoked at any time by the Settlor. This is not the same with an irrevocable trust where it is very difficult or sometimes impossible to change the trust.
Irrevocable Life Insurance Trusts
An irrevocable life insurance trust is created to control a permanent life insurance policy while the person insured (the Settlor) is alive and also names who is to receive the financial assets after that person passes (the beneficiary or beneficiaries). A trustee is also named in an irrevocable life insurance trust to distribute the assets to the beneficiaries.
In an irrevocable life insurance trust, the grantor should not have any ownership of their life insurance policy and if premiums need to be paid, that money should come out of a bank account owned by the irrevocable life insurance trust. The Settlor can also pay premiums, but it must be done in a way to remove the premium payments from the taxable estate of the Settlor. This way involves multiple steps and “Crummey letters.”
Medicaid Asset Protection Trusts
This type of trust is beneficial for those who are wanting to preserve their life savings or family home in case they may need nursing care one day. When assets are put into this type of trust, they are not counted against the individual or couple for Medicaid eligibility (after 5 years).
This type of trust is irrevocable, meaning that it is difficult to change once it’s in place. This is essential as assets in the trust are no longer legally owned by the creator of the trust and therefore will not be counted against them as assets owned.
Veterans Asset Protection Trusts
A veteran or a spouse of a veteran may be eligible to create a veteran's asset protection trust. This type of trust is similar to a Medicaid asset trust in that when trying to qualify for veteran assistance, an individual may be denied if it’s determined they have too many assets. When creating a Veterans asset protection trust, many choose to put their residence and other assets like investment accounts in that trust. Whatever the Veteran puts in this type of trust will not be counted against them for veteran assistance eligibility (after 3 years). Additionally, if a home is in this type of trust and later must be sold, any proceeds from that sale would not count against the Veteran if the rules of the trust are followed.
Special Needs Trust
Also known as a supplemental needs trust, this type of trust can be established for an individual with special needs and does not interfere with any additional government benefits they may already be receiving, such as supplemental security income, Veteran’s benefits, or Medicaid. As long as this trust is established by someone other than the person who is disabled, outside organizations will not see this financial support as a portion of their personal assets.
Establishing a Trust
These are only a few examples of the types of trusts available to individuals and couples. When establishing a trust, it is essential to explore all types of trusts to figure out which one will benefit your family the most.
The dedicated team at Krause Estate Planning can help you get started with this process and more. With more than 20 years of experience, Dan Krause knows the available options and makes sure his clients are making the best decision. Schedule an appointment by reaching out online or by phone — (608) 344-5491.