What Are The Common Types Of Trusts? What Are Their Purposes?
There are all kinds of trusts, but one of the most common types of trusts are testamentary trusts. Testamentary trusts are written into a Last Will and Testament and typically provide asset protection for beneficiaries. An example of a testamentary trust is a minor’s trust. The purpose of a minor’s trust is to ensure a minor or young adult does not receive his/her inheritance outright, but, instead, receives incremental distributions of his/her inheritance during ages preselected by the client creating the Will. For example, a client can create a testamentary minor’s trust which provides that any child of the client will not receive any of his/her inheritance until 35, and at 35, the child will receive his/her full inheritance. Another way a testamentary minor’s trust can be structured is to provide for laddered payments to the child. For example, a laddered testamentary minor’s trust could provide the child will receive a third of his/her inheritance at age 20, another third at 25 and the remaining third at 30. The assets in a minor’s trust are held and managed by a Trustee. Because there may be situations in a child’s life where it would be appropriate to make distributions prior to the ages specified in the testamentary minor’s trust, a typical testamentary minor’s trust will give the Trustee discretion to distribute funds to or for the benefit of the child before the preselected ages for distribution. Such discretionary distributions typically include the Trustee paying the child’s college tuition, providing a down payment for a home or paying for the child’s wedding related expenses.
Another typical trust is the supplemental needs trust, which can either be a testamentary trust, that is, built into a Last Will and Testament, or a standalone/living trust. These types of trust are designed to allow an individual with a disability to receive the benefits of an inheritance without suffering the consequent effects of disqualification for government benefits he/she may be receiving. Without employing a supplemental needs trust, a disabled beneficiary who receives and outright inheritance will lose his/her government benefits and be forced to spend his/her inheritance down to $0.00 before requalifying and reapplying for such benefits.
Like the minor’s trust, discussed above, the Trustee of a supplemental needs trust typically has the discretion needed to make distributions to or for the benefit of the disabled beneficiary. These discretionary distributions are designed to enhance the disabled beneficiary’s quality of life without disqualifying him/her from continued receipt of government benefits. Such distributions typically include paying for the disabled beneficiary’s vacations, clothing and meals.
A third common trust is a marital trust, which is employed to ensure that a spouse from a second or third marriage is taken care of for life, while also ensuring that the bulk of a client’s assets pass to his/her children, and not to the spouse’s children, loved ones or beneficiaries.
A fourth common trust is the Medicaid Asset Protection Trust. These trusts, unlike the other’s discussed above, are almost always a standalone trust, which is separate and distinct from a client’s Last Will and Testament. These trusts are typically created as part of a hybrid estate plan/elder care plan and are used to maximize the client’s qualification for government programs, namely Medicaid. The whole idea behind a Medicaid Asset Protection Trust is that by transferring an asset into a Medicaid Asset Protection Trust, the five year look back period begins to run for this asset. If a client remains healthy and out of a nursing home for five years after the date of transfer, the transferred asset will not be counted as a resource if the client applies for Medicaid coverage.
We always work with clients, a client’s investment advisor and a client’s selected CPA to determine the most appropriate way to fund a Medicaid Asset Protection Trust. The primary reason for this: once an asset is transferred into a Medicaid Asset Protection Trust, it cannot easily be transferred back to the client. Making such an important decision almost mandates coordination between the client, attorney, CFP and CPA to ensure maximum tax benefits and that the client retains a sufficient amount of assets outside the Medicaid Assets Protection to Trust to provide for themselves. To put it another way: the client has to be very certain that he/she will not need the assets they elect to transfer into the Medicaid Asset Protection Trust to pay living expenses. Once the assets go in, they do not come back out to the client. Despite the prohibition that assets be paid to the client who contributed them to the Medicaid Asset Protection Trust, a knowledgeable estate planning/elder care attorney will structure the Trust in such a way that the Trustee of the trust can make lifetime distributions to certain predesignated beneficiaries, and these beneficiaries are at liberty to provide financial assistance to the client if they so desire. In addition, a knowledgeable estate planning and elder care attorney can provide the flexibility within the trust so that the client can remove/change beneficiaries and Trustees, if desired.
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