Minnesota Trusts Lawyers at Hero, Jorstad & Jacobsen
You probably know you need a will for your estate planning needs. However, there are many estate planning advantages to having a trust. What is a trust and which type of trust will best serve your needs?
What Is a Trust?
A trust is a written agreement that allows the trustee to hold and control assets on behalf of one or more beneficiaries. The person establishing the trust is called the grantor (or sometimes the settlor). The property is called the trust principal or corpus. The assets in the trust can include real estate, bank accounts, stocks, and many other financial assets. The trustee has a fiduciary duty, or legal obligation, to manage the assets responsibly and see that the trust assets are used as defined in the trust document.
Trusts can serve many needs. They may help you control and manage your assets. If the trust is revocable, you can keep control of the assets during your lifetime and then designate the who will receive your estate after your death. Also, trusts usually avoid probate, thereby saving time, court fees, and in some cases, reducing estate taxes.
Types of Trusts
Trusts fulfill many purposes, including specifying how and when your assets will pass to the beneficiaries. Common types of trusts include:
Revocable living trusts
A revocable trust, also known as a living trust, allows you (the grantor of the trust) to keep control over your assets during your lifetime, but then helps the assets pass to your heirs outside of probate. You can name yourself trustee. The trust can be changed or revoked at any time, but becomes irrevocable upon grantor’s death, when a successor trustee will manage or distribute the assets. Although the trust may help avoid probate, estate taxes may still apply, if you are so fortunate to have $2.4 Million in assets.
A marital trust is usually created to benefit the surviving spouse and the heirs of the couple. The trust is intended to take full advantage of the marital deduction by making the surviving spouse the only beneficiary. This estate planning eliminates the possibility of other heirs receiving the assets and losing the marital deduction for estate taxes.
Irrevocable life insurance trusts
An irrevocable life insurance trust is set up to own a life insurance policy. The trust may either purchase the policy or take ownership of an existing policy. The trust must be irrevocable, so you can not dissolve it or make changes. You also cannot act as trustee of the trust. However, you can name the trustee. The trustee may be your spouse, an adult child, a trusted friend, or a financial institution. The purpose of the trust is to exclude the life insurance proceeds from the taxable estate of the deceased.
Trusts for minors
If you leave money to your children in your will, they will get control over the money upon reaching the age of majority. Establishing a trust for your minor children allows you to pass money to them while maintaining control over at what age and under what circumstances they receive the funds. Money can be disbursed in more than one payment, or allow it to be accessed for specific needs, such as college. The trustee could be your spouse, a trusted friend or relative, or a financial institution.
Special needs trusts
Supplemental needs trusts and special needs trusts are used to assist people with disabilities by providing financial resources while still maintaining the disabled person’s eligibility for government benefits. Both types of trusts are irrevocable, so they cannot be terminated or changed. What is the difference between these two types of trusts? The primary difference is whose money funds the trust. If the trust is funded using the disabled person’s own money, such as an inheritance or settlement from a lawsuit, it is a special needs trust. If it is funded by someone else, such as a parent, then it is a supplemental needs trust. It is important to obtain competent legal advice when establishing such type of trusts to ensure they are properly created and adminstered to preserve eligibility for government benefits for the trust beneficiary.
A spendthrift trust is created to limit a beneficiary’s ability to spend the principle of the trust wastefully. These trusts are often used to benefit people who are addicted to drugs, alcohol, gambling, or just are unable to handle money responsibly. In this case, the beneficiary is never the trustee. The provisions of the trust document determine how and when the money will be disbursed to the beneficiary. The beneficiary is not allowed to spend the principal of the trust or to pledge the trust as security for a loan.
For more information on trusts and estate planning, contact us.