Setting up a trust can provide peace of mind knowing that the care you have provided the people and possessions you love will continue. Knowing which type of trust is best suited for your needs and how to begin can be daunting, which is why we wanted to share some foundational knowledge to help you in your financial wellness journey.

An individual will use a trust when he or she wants a third party to manage property either for themselves or for another party.  Pursuant to the terms of the trust, the settlor (creator) or testator directs how the property will be managed, the terms of distribution, and the period for which the trust will stay in existence.  The trustee must look to the terms of the trust instrument, whether it be an inter vivos trust (created during lifetime) or a testamentary trust (created under a will), for purposes of administering the property subject to the trust. 

There are many uses for trusts in estate planning.  Several examples may be helpful.  Let us assume that grandparents desire as part of their estate plan to transfer property to grandchildren by way of annual gifts of $14,000.00 per year.  Let us assume that the grandparents want the donations to be managed and held for the grandchildren at least through age 25.  In this case, the grandparents may have a desire that the monies be utilized for the college education of the grandchildren.  The grandparents in this case may want to set up an inter vivos trust wherein the grandchildren are named as the income and principal beneficiaries with instructions to the independent third party as trustee to manage and distribute the income and principal for the grandchildren’s college education.  This is somewhat oversimplified but is a normal scenario.  A “Section 529 Plan” should also be considered in this scenario because it may have advantages over a trust.

A second scenario could be the use of a “testamentary trust” under the terms of a will.  In this situation, the parent as testator could establish a trust in the will to become effective in the event of the parent’s death.  No assets flow to the trust until the death of the parent.  In the will, the parent would direct the property to pass to the trust, would designate the appointment of a trustee and the terms of management and distribution of the trust property for a specified period during the lifetime of the children.  Assuming for the moment that there is no surviving spouse, the parent might provide that the trustee distribute all trust income to the children during the term of the trust and that one-half (1/2) of the trust principal be distributed when a child reaches age 30 and the balance when the child reaches age 40.  The purpose for staggering the distribution of the trust principal is to not put all of the property into the hands of the child at one time but to allow for the child to have utilization of some of the property at specified ages.  

A third use of a trust could be the utilization of what is known as a life insurance trust.  Let us assume that husband and wife have a very substantial estate and desire that insurance be utilized as part of the estate plan.  In such a circumstance, a life insurance trust could be established with donations being made to the trust for the benefit of the children who are the income and principal beneficiaries of the trust.  The money donated to the trust could then be utilized by the children to purchase a life insurance policy on either spouse or a second to die policy on both spouses.  In such circumstance, neither of the spouses would be the owners of the insurance, and the proceeds could be utilized to help pay for the estate taxes that would ultimately become due. 

Much has been made recently about the use of revocable living trusts as an estate planning tool.  In certain instances, a revocable living trust can provide a great deal of benefit for management purposes for those parties who cannot manage their affairs.  However, the revocable living trust is not necessarily a vehicle which is going to avoid the work involved in probate and avoid the concomitant succession expenses.  The use of the revocable living trust does not obviate the necessity to obtain valuations with respect to all properties in the trust for federal and state death tax purposes. 

The acquisition of the valuations of the properties is probably the most time consuming aspect of an estate.  Many people are under the assumption that the use of a revocable living trust will avoid forced heirship.  This is simply not true.  Many have been led to believe that you have to use a revocable living trust in order to obtain the benefits of the federal estate tax marital deduction or the federal estate tax unified credit.  This is simply not true.  Most people who execute revocable living trusts also execute what is known as a “pour over will” in order to put assets into the trust that otherwise might not have been placed in the trust.  The execution of the will itself will require that the will be submitted to probate and that all the other succession functions be carried out.  Some who tout the living trust argue that wills are always contested.  This is simply not true.  Many living trusts are sold by individuals selling annuities and other products.  

Although there are many types of Trusts that are utilized for Estate Planning, Services By Monica 

will focus on the 4 most common types of Trusts utilized in the State of Louisiana.  They are:  Revocable Living Trusts, Irrevocable Trusts, Joint Trusts, and Special Needs Trusts.   

Revocable Trusts:  

A Revocable Living Trust is a trust into which you can transfer your assets.  Essentially, it serves as a legally-protected vessel for various types of assets, including:

  • Homes
  • Vehicles
  • Boats
  • Firearms
  • Financial accounts, such as bank or brokerage accounts 

Because this type of trust is revocable, you can move assets in and out of this type of trust as necessary while avoiding probate down the road.

Irrevocable Trusts:

Where you can transfer your assets in and out of a revocable trust, an irrevocable trust is the opposite. For irrevocable trusts, you can’t edit or modify once it’s established unless you have the beneficiary’s permission.

In other words, once you transfer your assets into an irrevocable trust, you lose all ownership of those assets. 

So why would you want such a stringent type of trust in your estate plan?

An irrevocable trust can help shield your assets from estate or gift taxes – since they are removed from your estate. Additionally, an irrevocable trust can protect these assets from creditors.

A qualified estate planning attorney can help you determine if an irrevocable trust suits your situation.

Joint Trusts:

You may prefer a joint trust if you’re creating it with another person, such as your spouse. In a joint trust, all marital assets are kept in a single trust. 

Both spouses can legally control the assets held in a joint trust, serving as a revocable trust. When one partner dies, the surviving partner becomes the trustee, and the trust becomes irrevocable. 

A joint trust may have less asset protection than a single trust for each spouse since a legal judgment over one spouse could impact all of the marital assets in a joint trust.  

Special Needs Trusts:

A Special Needs Trust is one designed to benefit a loved one with special needs who may not be able to properly handle being given the assets directly or would not be properly served by probate. 

If you are considering utilizing a Trust as a part of your Estate Planning, contact us for a

If you are ready to protect your assets, family, or your business, Services by Monica can evaluate your estate and suggest the best possible Trust in order to meet your needs.

Disclaimer:  The information you obtain at this site is not, nor is it intended to be, legal advice.