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The Importance of and the Different Types of Trusts

The Importance of and the Different Types of Trusts

Trusts are not exclusively for wealthy people. Here's what else you should know about them.

While it’s not something we like to think about, as parents in New York, it is important to have a plan in place to protect your child should something happen to you or your spouse. Planning for the future is important to ensure that your children are well taken care of and your assets are preserved for your loved ones. One way to ensure that assets are protected for your children is to set up a trust. To find out if a trust is appropriate for your family, consult with a New York estate planning attorney.

There are different kinds of trusts that serve various purposes, but they all begin with a trust agreement, a trustee (the person you designate to administer the trust assets), and at least one beneficiary.  Read on for a brief overview of the different kinds of trusts and the benefits each type of trust can provide.

Why are trusts important?

The most important reason for setting up a trust is to ensure your children will receive their inheritance without any problems.  Trusts can also help protect assets from creditors, reduce estate taxes, and eliminate probate time (the amount of time spent in court on a person’s death).  

Who should have a trust?

As a rule of thumb, parents with young children who have assets and life insurance amounting to more than $300,000 should consider setting up a trust. 

Misconceptions About Trusts

While many parents think trusts are only for ultra wealthy families, trusts are commonly used by middle and upper-middle class families as well.  Another misconception about trusts is that there are ongoing fees throughout the entire time you have a trust. With the exception of very large trusts, most trusts don’t incur any significant ongoing fees.

The Different Types of Trusts

Testamentary Trusts

A testamentary trust is the most common type of trust set up by parents of young children.  A testamentary trust is created by your will, and it only goes into effect after you pass, so no maintenance is necessary during your lifetime. In order to modify a testamentary trust, you make changes to your will.

One benefit of a testamentary trust is that it prevents your kids from having access to their inheritance at an early age.  In the absence of a trust, kids can inherit large sums of money at age 18, when they lack an ability to make smart financial decisions.    

If you have more than one child, a testamentary trust provides flexibility to allocate assets to your children fairly in a way that takes into consideration each child’s unique needs.  For example, if one child develops a disability or an unexpected medical need, you wouldn’t want that child’s share to be depleted relative to his or her siblings.  A testamentary trust also prevents your children’s inheritance from adversely affecting their eligibility for college aid, since the trust assets are not technically owned by the children. 

A testamentary trust can also be set up in a way that protects against a second spouse in the event that the surviving spouse were to remarry or have children with another partner.  The trust ensures that the money is used solely for your children and your spouse. 

If you have a child with special needs, a testamentary trust can provide for them without jeopardizing their eligibility for government benefits, such as Medicaid and Supplemental Security Income payments. 

Revocable Trusts

The main benefit of a revocable living trust is that is allows your estate to bypass probate—which is the court process that transfers ownership of your assets to your heirs when you pass away.  Probate is a public process that can be lengthy, costly, and burdensome for your family (especially if you live in Brooklyn or Queens, where the probate courts are notoriously slow).

While probate can tie up money in court for months, assets in a revocable living trust are accessible immediately to cover important expenses like child care, rent payments, or a mortgage. A revocable living trust can also keep the value of your assets private; otherwise, the amount left to your loved ones becomes public information. 

Revocable living trusts are also commonly used by international families because a New York probate court will not allow a foreign person to be appointed as the sole executor or the sole trustee of a testamentary trust created in a will.  Trustees of revocable living trusts are not subject to court approval, and there is no restriction on the appointment of a foreign individual.

Irrevocable Trusts

An irrevocable trust is a type of trust that is primarily used for estate tax planning.  Parents can transfer a life insurance policy into the name of the trust so that the death benefit is not included in their estate for estate tax purposes.  For this reason, this type of trust is often referred to an irrevocable life insurance trust, or an ILIT.  The down side of an irrevocable trust is that it is, not surprisingly, irrevocable, so you can’t take the money back out of the trust – at least not without some difficulty.  Because life insurance is not generally used during your life, it is an ideal asset to transfer to an irrevocable trust.

Another benefit of an irrevocable trust is that the trust assets are shielded from any future creditors of the person setting up the trust, as well as any creditors of the beneficiary.


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