The vast majority of people in the United States have this idea that only really rich people need to have a trust. Maybe you’ve heard the term “trust fund baby”, or you associate the word “trust” with “trust fund’ in general, but the truth is that anyone who owns any property or has any family members should have a trust in order to a) keep their money safe (even if there isn’t an excess amount of it!) and b) save their families from future stress and hardship that they would otherwise have to endure if a trust didn’t exist.
There are actually many different types of trusts available to choose from. While you likely should have a trust, what kind (or kinds!) you should have will depend on your unique financial situation, your family dynamics, your goals, and other circumstances that are specific to your life.
Function Of A Trust
Before you choose a trust, you need to know why you are making one and what you want it to accomplish for you (that will have a major impact on the type you create). There are two major benefits of any trust:
- A trust prevents probate.
Probate is a court process that distributes a deceased person’s assets to their beneficiaries by following a specific set of legal steps. It’s not desirable for many reasons – it’s tedious and involves plenty of paperwork, it can take months or years to complete, and it can get expensive. Assets named in wills have to go through probate (for example, if you leave your house to your eldest child in your will, they have to finish probate first before they can officially inherit it or sell it or move in). Trusts do not have to go through probate; assets in any kind of trust pass directly to the named beneficiary without the need for court supervision according to the trust’s terms.
- A trust protects your hard-earned assets
One of the major reasons to make a trust is that it secures your money from risk. While different types of trusts offer different levels of security, all trusts add an additional layer of protection than if you didn’t have one at all. You can set the terms of the trust so you can determine what happens to the assets inside and when. For example, if you have a family member who struggles with addiction or gambling, you can arrange their inheritance to be paid out to them in small amounts over time so that they don’t waste it. Certain types of trusts can also shield your assets from taxes, from government assistance program eligibility, and from being taken away in lawsuits. And again, trusts don’t have to go through probate, so they protect your assets from being depleted by court fees and save your family from that hassle!
Here is a brief overview of the different types of trusts so you can learn more and make a more informed decision!
Understanding Revocable Vs. Irrevocable Trusts
There are two main categories of trusts: revocable and irrevocable. Most of the trusts discussed in this blog post fall into one of these two umbrella categories.
Revocable trusts allow you (the grantor/ trustor/creator) to change the terms at any point during your lifetime. You can add beneficiaries, take away beneficiaries, move assets in or out, etc. It’s completely flexible! Irrevocable trusts are the opposite; once you set up the trust and its terms, you can’t make any changes without the approval of all of the beneficiaries and (usually) a judge’s order or court process.
It would seem like it’s a no-brainer to go with a revocable trust – who wants to make something that is so inflexible? However, irrevocable trusts are like a steel wall rather than a gate; way more intimidating, but way more secure. Assets in an irrevocable trust aren’t subject to estate taxes. These types of trusts relieve the beneficiaries of tax responsibility for income generated by the assets in the trust. Assets in the trust are also protected from any kind of legal judgement (like a lawsuit) and from creditors.
A trust attorney can help you understand further whether a revocable trust would be sufficient for your needs or if you should consider an irrevocable trust (or if you should set up both, and transfer different assets into each!).
Here are a few types of revocable and irrevocable trusts that a lawyer might recommend:
Special Needs Trusts – A special needs trust is set up for people with disabilities, and is designed to help them have access to financial support without disqualifying them from being able to receive government benefits, like Medicaid or Social Security. There are third-party special needs trusts, first-party special needs trusts, and pooled trusts, which may be revocable or irrevocable.
Charitable Trusts – Charitable trusts are irrevocable trusts that allow you to donate assets to a charitable organization or nonprofit of your choosing; they may also provide you or your beneficiaries with a steady stream of income for a set period. There are charitable lead and charitable remainder trusts.
Joint Trusts – Joint trusts are created by two people, usually married spouses, who act as co-trustees; these trusts designate the money and possessions of each spouse to be handled the same way after both of their passings. Upon the second spouse’s death, the trust becomes irrevocable.
Blind Trusts – A blind trust gives full control of the trust to the trustee, rather than the grantor; the trustee has full discretion, and neither the grantor nor the beneficiaries is aware of or has any say in how the assets in the trust are managed. These trusts may be ideal if you want to avoid a conflict of interest or expect arguing amongst family members.
Asset Protection Trusts – Asset protection trusts are irrevocable trusts designed specifically to protect assets from creditors. These can be foreign or domestic!
Attorney-Drafted Vs. DIY Trusts
Any kind of trust, even the simplest revocable kind, is incredibly difficult to set up. Even if you can find a way to set it up yourself based on information you find online, that information may not be accurate or legally compliant with your state’s laws, and you could make many mistakes that leave your assets vulnerable. It’s always in your best interests to work with an attorney who has extensive experience with various types of trusts and who can take care of the paperwork for you! At The Law Office of Michelle E. Murphy, we’ve spent over 20 years helping Texans draft trusts that they and their loved ones can have confidence in. Call us today to schedule a free consultation and discuss your options!