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You might associate trusts with the ultrawealthy, or with young adults who don’t have to work. But trusts have benefits for a far wider swath of the socioeconomic spectrum — a swath that likely includes you.
“Not knowing how trusts work or what they’re used for, other than passing down assets to children, can keep people from setting one up,” said Michele Collins, director of advanced sales at MassMutual’s Boston office. “So can being afraid of the cost as well as being uncomfortable planning for death, which is when trust discussions often come up.”
Here’s a rundown of the most common types of trusts and their purpose.
Revocable trust
If you retitle your individual financial assets into a revocable trust, you’ll still have control over the money during your lifetime and your heirs will still avoid probate. But you’ll also be able to leave those assets to your kids without worrying about them inheriting a large sum at a bad time.
“A revocable trust or revocable living trust can be single or joint, meaning you can create it alone or with a spouse,” Collins said. “What makes it more approachable is that it doesn’t require you to give up control of your assets during your lifetime.”
The flip side, Collins noted, is that, at your death, the trust becomes irrevocable and the assets are considered part of your gross estate. (Learn more: Revocable vs. irrevocable trusts: What’s the difference?)
Typically, you will serve as the initial trustee, but you’ll name a successor trustee to oversee the trust: perhaps your spouse, should you die first, and a good friend, should you die second. Your trust documents can indicate what conditions trigger a distribution of assets, such as your child reaching a certain age, pursuing a degree, or starting a business.
You don’t need to be a multimillionaire to benefit from a revocable living trust. If your only assets are a house and a life insurance policy, a trust could still help preserve those assets for your heirs better than payable-on-death designations could.
A revocable trust is best paired with a pour-over will, which acts as a backstop against assets you forget to retitle into your trust. (Learn more: Types of wills and what they are used for)
Testamentary trust
The second-least intimidating type of trust is a testamentary trust. It’s an irrevocable trust, which means you lose control of your assets once they’re in it. But the trust won’t exist until you die and it is created under the terms of your will, at which point you would lose control of your assets anyway — except that through your trust documents, you can actually exercise control of your assets from the afterlife (or rather, you can legally require your trustee to manage those assets per your instructions).
Let’s say you’re a single parent with two kids, ages 4 and 7. Your spouse’s early death has compelled you to update your will and basic estate plan.
Your will names guardians who will take care of your children if tragedy strikes your family twice. It also lays the groundwork for a testamentary trust that will receive your assets — including the death benefit from your life insurance policy. This kind of trust can be helpful if you die while your children are minors.
Further, it names a trustee to manage your kids’ inheritance according to your wishes and the kids’ best interests. (Related: How to choose a trustee)
Special needs trust
If you’re among the millions of individuals who have a disabled child, dependent, or family member, you might know a thing or two about special needs trusts. If you don’t, you should: They can make sure your family member qualifies for the government benefits they may need now or in the future, such as Medicaid and Supplemental Security Income, while providing the financial resources to pay for things that public assistance may not, such as a cell phone, computer, transportation, or tuition. (Find out more: Special needs trusts: What are they and who needs them?)
Revocable living trusts, testamentary trusts, and special needs trusts can be excellent ways to provide for and protect your loved ones, regardless of your net worth. Also, for those with significant assets or income, there are additional types of irrevocable trusts to consider.
Irrevocable life insurance trust (ILIT)
An ILIT (pronounced EYE-lit) is a trust created to primarily hold a life insurance policy, but it can hold other assets as well.
“Many people created ILITs when the federal estate tax exemption was only $1 million, but there are other reasons — control, creditor protection, and protecting beneficiaries from themselves — to keep an ILIT if you have one, or consider one if you don’t,” Collins said.
If you already have permanent life insurance, it could make sense to gift or transfer it to a new or existing trust, though in some cases it might be best to get a new policy that the trust owns from day one.
“You’re never going to be more insurable than you are today if you want to get a life insurance policy for an ILIT, and survivorship policies often fund this type of trust, so it’s a blended rate,” Collins said.
Because a survivorship policy only pays a death benefit after both insureds have died, in some situations, it can be easier for a couple where one spouse has health issues to get coverage. Also, you’re buying one policy instead of two, which may allow you to get more coverage for less money.
Another reason to create this type of trust is to leave assets to a child in an unstable marriage. If you’re concerned that your child may get divorced and you don’t want their spouse to get half of the inheritance, an ILIT trust can help. (Learn more: 7 situations where a trust might help)
Asset protection trust
An asset protection trust can keep creditors — perhaps ex-spouses, banks, the other driver in a car accident you’re blamed for — from making successful claims against your wealth. By placing investments, real estate, or other valuable resources in this type of trust, you may be able to keep more of your assets in the family should an unfortunate event occur.
You also might want to consider an asset protection trust to preserve the family home and other assets for a child when you may need to rely on Medicaid at least five years from now.
“If you’re considering this option, visit several Medicaid facilities in your area and see if you think you would be comfortable living there,” Collins said. “If you do, set up your trust with an elder law attorney who understands the intricacies of your state’s Medicaid laws.”
Lifetime access trust
A lifetime access trust is another type of irrevocable trust. You create the trust, and your spouse can be named a lifetime beneficiary. The trustee is given discretion to distribute the trust assets for your spouse’s health, education, maintenance, and support (living expenses) during their lifetime, then pass any remaining trust assets to your descendants.
“A lot of people don’t like the idea of giving up control,” Collins said. “But if you’re in a stable marriage and your spouse is the beneficiary, you still have indirect access.”
When setting up a lifetime access trust, beware of the reciprocal trust doctrine. It states that if you and your spouse create identical irrevocable trusts naming each other as beneficiaries, the trusts cancel each other out and you lose your estate tax protection.
A-B trust
Also known as a marital trust, credit shelter trust, or family trust, an A-B trust helps married couples maximize estate tax exemptions. With the higher estate tax exemption created by the Tax Cuts and Jobs Act of 2017 scheduled to sunset on December 31, 2025, these trusts could become more popular again. And they can be set up to account for tax uncertainty through the use of disclaimers. (Related: The 2026 estate planning question mark)
Here’s how they work. In your will, you leave everything to your spouse — with a caveat. Within nine months of your death, your spouse can make a written qualified disclaimer of any of those assets. The disclaimed assets then go into the credit shelter or family trust. This is one way to fund a credit shelter trust that has become common since portability was made permanent.
“For tax purposes, those assets are treated as if your spouse never received them, and once they’re in the trust, they’re protected from creditors and removed from your taxable estate,” Collins said. “Your spouse can decide how much to disclaim based on their financial needs and how high the estate tax exemption is when you die.”
Without disclaimers, these trusts are typically funded based on a formula that allocates between the marital and credit shelter trusts. If the formula amount left to the credit shelter trust is too low, your spouse would have plenty of money, but your estate (really, your heirs) could lose a significant sum to taxes. If the formula amount is too high, your estate wouldn’t be taxed, but you could accidentally leave your spouse with nothing. (Learn more: What is estate planning and why is it important?)
Charitable remainder and lead trusts
A charitable remainder trust (CRT) typically accomplishes five main goals:
- It removes from your taxable estate assets with a low cost-basis that have appreciated significantly.
- It avoids capital gains taxes.
- It provides funding for a 501(c)(3) nonprofit organization of your choice.
- It offers a charitable income tax deduction.
- It preserves a portion of its assets or income for your family.
A charitable trust’s structure also offers flexibility in who benefits from your trust assets and when.
With a charitable remainder trust, you or a designated beneficiary will get an income stream for a certain number of years, after which the remaining trust assets are distributed to the charity you selected.
Another type of charitable trust is the charitable lead trust (CLT). If you create a charitable lead trust, your chosen nonprofit receives an income stream for a certain number of years. After that, the remaining trust assets go to you or your beneficiaries.
“Some people prefer this option because they enjoy seeing the charity benefit from their contributions during their lifetime while also knowing they are leaving something to their beneficiaries,” Collins said.
Pet trust
A pet trust is one way to not only set aside funds for your pet’s care if you die or become incapacitated, but also to specify the requirements of that care and provide legal accountability for following them.
“These trusts can be particularly important if you own a bird or turtle that could easily outlive you,” Collins said. “They can be established as a separate trust or as a provision in your revocable trust.” (Learn more: Planning for your pet’s care after your death)
Dynasty trust
A dynasty trust allows ultra-high-net-worth households to protect and preserve wealth for multiple generations by minimizing federal estate and generation-skipping transfer taxes. It is best created under the laws of a state that has a rule against perpetuities, allowing trusts to last for multiple generations rather than terminate after a limited number of years. Examples of these states include Alaska, Nevada, and South Dakota.
A dynasty trust is often funded with business or real estate assets that are expected to appreciate considerably. It requires careful planning to allow trustees sufficient flexibility to modify the trust over potentially hundreds of years as taxes and family circumstances change.
The importance of professional guidance
Establishing and maintaining a trust does cost money, but the potential benefits in asset protection, tax efficiency, and carrying out your wishes can far outweigh the expenses. To establish a trust, you should consult an experienced estate planning attorney who can advise you on state-specific laws and the best type of trust or trusts for your situation.
Talk with a MassMutual financial professional. We can help you connect with one at MassMutual financial professional.
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