When people think of trusts, they may think of very wealthy people who have lots of assets that need to be protected, but trusts can benefit average-income families as well. Young & Young can help you determine if a trust is right for your estate plan.

A trust is a contract that serves to manage assets by one person or entity, the trustee, for the benefit of others who are the beneficiaries. A trust creator, referred to as the “settlor” or “grantor”, creates the trust, usually contributes assets to the trust, appoints a trustee to manage the trust and its assets, and designates the beneficiaries. The trustee has a legal responsibility to follow set instructions in managing the assets on behalf of the beneficiaries. Depending on how the trust is set up, the beneficiaries can have some rights to the assets immediately. For example, the beneficiaries can be entitled to any interest or profit earned by the trust each year, and/or have rights down the road, as in a trust that grants its assets to the beneficiaries when they reach a certain age. Trusts have many uses in estate and legacy planning since they can provide much more flexibility than a straight grant of property.

Different types of trusts are available depending on the client’s goals and objectives, such as tax savings and Medicaid eligibility. Examples include:

Revocable Living Trust

Also referred to as a revocable trust or living trust, this trust is established during the settlor’s life to determine the disposition of his/her assets should he/she becomes mentally disabled and upon his/her death. During the settlor’s lifetime, the settlor can be both the trustee and beneficiary of the trust, and therefore have complete control over, and derive all benefits from and pay all taxes on the trust assets. The trust identifies specific trustees and beneficiaries to be automatically designated upon the disability or death of the settlor.

Family and Marital Trusts

These are often sub-trusts within a living trust or sometimes contained in a will. Their purpose is to maximize the amount of property that may be passed on free of state and federal estate tax and to ensure that no estate taxes will be owed until the death of the surviving spouse. A marital trust takes advantage of tax exemptions for the sole benefit of the surviving spouse during his or her life. A family trust or credit shelter trust can be for the benefit of the spouse, children, and/or any other beneficiaries.

Irrevocable Trust

An irrevocable trust is a trust that cannot be modified once created and is best used to make a permanent gift. Because the settlor has relinquished control over whatever assets may be put into these trusts, care must be taken in drafting the instructions for the trustee and for use by the beneficiaries of the assets. Different types of irrevocable trusts accomplish different objectives and can be used in conjunction with a living trust to maximize estate tax savings and protect and transfer wealth.

Irrevocable Life Insurance Trust

Sometimes referred to as an ILIT, this trust is often used when people own large life insurance policies. Although proceeds of life insurance are not subject to income tax to the beneficiaries, the proceeds may be subject to state and/or federal estate tax unless the insurance policy is owned and maintained according to a properly drafted life insurance trust. A key benefit is that the life insurance proceeds can be delivered to beneficiaries in protected ways, and be protected from creditors and predators.

Special Needs Trust

A special needs trust, also known as a supplemental needs trust, is a trust whose beneficiary is an individual who has a disability and who may be eligible for governmental assistance in the form of supplemental security income, subsidized housing, Medicaid, etc. Because these programs are generally needs-based, eligibility to receive benefits is dependent on falling below certain wealth thresholds. Assets held in a special needs trust for the benefit of a person with a disability, if set up properly, will not be counted towards determining that person’s total assets, so they will not impact eligibility for governmental aid.

Testamentary Trust

A testamentary trust is created by the terms of a person’s will and is commonly used to manage assets passing to minors or to others with special needs or disabilities.