Trusts are a very common, flexible, and powerful part of any estate plan. They come in a variety of forms and serve different purposes. Here are some common types of trusts.
Revocable Living Trusts
The most common trust is a Revocable Living Trust. This trust allows the trust creator to remain in control over the trust assets. After creating the trust, the trust creator can amend or revoke the trust at any time. This sort of trust is commonly used to avoid the costs and burdens of probate. However, this trust does not help when it comes to other forms of issues, such as avoiding estate taxes, qualifying for Medi-Cal, or avoiding interference with government benefits.
Medi-Cal Asset Protection Trusts
Long-term care can be expensive, an average of $8,100 per month for a full care facility in California. That’s just average, meaning the costs could be much, much more. Medi-Cal can cover some or all of the costs. However, the qualification process can be difficult and have severe limits on income and assets. Even if you successfully receive Medi-Cal, Medi-Cal has the right to reimbursement from your estate, including the primary residence, insurance proceeds, and remaining retirment or investment accounts. A Medi-Cal Asset Protection Trust is designed to hold the assets of someone needing long-term Medi-Cal to allow them to qualify easier and avoid reimbursement. Although the trust creator cannot easily revoke this trust, the trust assets are held for the benefit of the creator and the creator’s heirs.
Special Needs Trusts
Some people are dependent on a variety of government programs due to their mental or physical disability. Whether the result of birth, injury, or natural aging, these government programs are essential. However, receiving a large payment, whether from inheritance, insurance, or successful lawsuit, can disqualify someone for an essential program. Special Needs Trusts are designed to provide for the comfort and welfare of a beneficiary without endangering their government benefits.
Irrevocable Life Insurance Trusts
Any insurance proceeds that get deposited into an estate is subject to estate tax. This includes payments into a Revocable Living Trust. But putting a life insurance policy into an Irrevocable Life Insurance Policy removes the insurance proceeds from your estate. The proceeds can then be used however the trust dictates. This could be a dispursement immediately or the proceeds can be held and invested for later dispursements. The dispursements can be a healthy source of income for heirs that is not accessible by creditors, ex-spouses, or abuse. One drawback to these trusts is that once a policy has been transferred into the trust, you cannot borrow against the policy or change the named beneficiary.
Charitable Remainder Trusts
Charitable Remainder Trusts encourage charitable donations after death by giving a tax deduction this year. Property placed in the Charitable Remainder Trust can be used by the trust creator for the remainder of his/her life. After death, the property is automatically transferred to the charity. Since the property is automatically transferred, it is not included as part of the taxable estate. Some charities may even provide benefits for large donations using a Charitable Remainder Trust, such as an alma mater that names a chair on a donor’s behalf or provides free tuition to the children of major donors.
Many Other Types of Trusts
These are only a few examples of trusts that are available.