Preparing a comprehensive estate plan can help ensure that your most important assets will be managed in accordance with your wishes both during your lifetime, and after you pass away. Just as crucially, your estate plan can help ensure that your loved ones will be supported during a difficult and emotional time.
Here in Michigan, one of the most important estate planning devices to understand is the trust.
Trusts come in many different “shapes and sizes,” and there are many different ways to strategically use a trust in order to suit your particular needs — from leaving money to charity, to providing for the next generation of your family, to helping some of your most important assets avoid the potential for lengthy probate issues.
Whether you are taking steps to create or update your estate plan, preparing to serve as a trustee, or are curious about your rights and responsibilities as the beneficiary of a trust, it’s important to understand the many different types of trusts that you may come across.
What Is a Trust?
As you work toward solidifying your estate plan, a trust can be an effective complement to your other legal documents.
A trust is a written agreement created by the settlor, also known as the grantor, which names an individual who is responsible for managing property, as directed by the trust agreement. The person who is responsible for managing the assets placed into the trust is known as the trustee; individuals who may be entitled to receive trust assets, as directed by the settlor, are known as beneficiaries.
It’s important to keep in mind that a trust must be funded with your assets —otherwise, it will remain an empty vessel. So, once the trust is created, it is essential to re-title the assets of your choosing into the trust. There are many important considerations to be addressed in the creation of a trust, so that it is designed to your specifications and in line with all necessary legal formalities.
For example, one of the practicalities involved in creating a trust is appointing the trustee, along with one or more successor trustees, who will take on the responsibilities of managing the trust if the primary trustee is unable to do so. In most situations, the settlor will assign themselves as the trustee, in order to maintain control over the trust assets throughout their lifetime. If the settlor is unable to perform their duties as trustee, their successor trustee would be granted the legal responsibility of managing the trust assets as directed by the terms of the trust. For this reason, it is incredibly important to nominate a successor trustee who will be able to handle the responsibility, and capably abide by the directions that you set down for the trust.
Many different types of assets can be transferred into a trust, including investments and securities, tangible personal property, bank accounts, business interests, and real estate.
From an estate planning perspective, trusts can offer numerous advantages — both for you as the settlor, and for your future beneficiaries. Placing assets into a trust can allow them to pass to your beneficiaries, without having to go through the oversight of the probate courts. This can save time, money, and stress for your loved ones during the trust administration process, and can help protect your family’s privacy.
Crucially, trusts can give you a great deal of control over your assets, both while you are living and after you have passed on. A trust can be a straightforward way to set aside assets in order to care for a minor, or a dependent with special needs. Trusts can also enable you to set down rules, requirements, and restrictions for your beneficiaries, controlling how, when, and if they may receive their inheritance.
The creation of a trust can also help protect your estate from certain taxes and fees, which might ultimately allow you to provide more for your beneficiaries. Having a trust can also allow you to create a plan for managing your most valuable assets if you become incapacitated and upon passing.
Interested in learning more? Be sure to visit our FAQ page on trusts for more information, or read about some common scenarios and stories involving trusts here.
Understanding Common Types of Trusts
It’s important to understand that trusts, as with so many other matters pertaining to estate planning and administration, are not “one-size-fits-all.” There are many different types of trusts to be aware of and choosing the right type of trust for your needs will be entirely dependent on your unique circumstances, including the size and nature of your estate and the needs of your chosen beneficiaries.
If you are interested in learning more about the various types of trusts available to you, we are here to help. Let’s explore some of the most common types of trusts in more depth.
Revocable Vs. Irrevocable Trusts
Before we dive into specific types of trust, one concept to understand is the distinction between two categories of trusts: revocable and irrevocable.
Put simply, a revocable trust, also called a revocable living trust or an inter vivos trust, allows you to maintain control of your assets during your lifetime. Revocable trusts can be modified or revoked at any time while the settlor is alive. Typically, the settlor will act as the trustee during his or her lifetime, with the successor trustee stepping in after his or her death. Revocable trusts avoid probate and offer a high degree of flexibility. Because of their versatility and ease of use, revocable living trusts are among the most popular types of trusts used today.
Simply put, an irrevocable trust cannot be revoked by the settlor once it is established. Once an asset is placed into an irrevocable trust, the settlor is no longer considered to be its owner. For this reason, irrevocable trusts are often used to help safeguard assets from creditors and are often used to minimize or shelter from estate and gift taxes.
Other Common Types of Trusts
Whatever your goals, there is a trust out there for you. Some of the types of trusts that are used in Michigan estate planning include:
Supplemental (Special) Needs Trusts
This type of trust is designed to help your future beneficiaries who happen to be physically, mentally, or developmentally disabled and who are receiving (or are likely to receive) government benefits. The special needs trust structure helps provide for continuing care and maintaining quality of life for your loved ones with a disability, while increasing the probability that an inheritance will not disrupt your loved one’s government benefits. It is imperative that you create the trust and not leave it to your heirs to do so. If you fail to plan, you are creating a huge loss of assets which would have otherwise been available to your loved ones after the passing of the future beneficiary receiving government benefits. Please contact an attorney immediately if you have a loved one who receives or is likely to receive government benefits in the future.
Charitable Trusts
This type of trust assigns a charitable cause or organization as one of its beneficiaries. In addition to helping support a cause that is meaningful to you, this type of trust can offer certain tax advantages. Charitable trusts are entitled to special treatment under the law and may be used to significantly reduce or even eliminate the amount of a potential estate tax.
Pet Trusts
An increasingly popular type of sub-trust, a pet trust may be used to allocate resources for the care and well-being of your furry friend.
Irrevocable Life Insurance Trusts
Funded by a life insurance policy, this type of irrevocable trust is often used to help pay for some or all of the expected estate tax, when the tax is likely unavoidable.
IRA Trusts
This type of trust can be used to manage your IRA assets after your death. If structured properly, this trust is set up to be the beneficiary of your IRA. After your death, the trustee will then be able to control how these assets are distributed or managed, in line with your directions. Keep in mind that there are often significant tax consequences associated with IRA transactions, and it may prove beneficial to consult with your attorney and financial advisors to explore the advantages and disadvantages of this strategy.
Qualified Personal Residence Trusts
A QPRT can be useful for reducing estate taxes and offering creditor protection, depending on your circumstances. This specialized type of irrevocable trust is meant to hold your primary or secondary residence. This removes its value from your taxable estate, which can reduce the tax burden on your beneficiaries.
Marital Trusts and Credit Shelter Trusts
Marital trusts are established by one spouse for the benefit of the other. Typically, these are set up so that when the first spouse passes, the trust assets transfer to the surviving spouse. There are multiple ways to structure marital trusts for tax and probate benefits, and it’s important to consult with an attorney to explore all your options.
By maximizing use of the applicable exclusion amount, credit shelter trusts are complex tools used to shelter wealth transfers from transfer tax.
Spendthrift Trusts
A common concern is that beneficiaries will waste or mismanage their inheritance. A spendthrift clause in a trust allows the settlor to dictate when and how beneficiaries may access trust assets, helping to prevent their misuse and avoid third parties taking advantage of their beneficiaries.
Testamentary Trusts
A testamentary trust is set up through your will. Often, this is used to pass assets into a trust that will be managed on behalf of the decedent’s children.
Totten Trust
Also referred to as a “payable on death” account, this type of structuring allows for assets that you put into a bank account or security to transfer to a named beneficiary upon your passing.
Looking for Assistance with Trust Creation, Administration, or Issues?
Trusts are a popular estate planning tool, but it is often essential to receive guidance from an experienced, skillful, and knowledgeable attorney in order to ensure that they are properly established and maintained.
Similarly, if you are a trustee, personal representative, or otherwise involved in the administration of an estate, last will, or trust, you probably have questions. An experienced probate and trust attorney can provide informed professional advice to guide you through the legal process, explain your legal obligations as a fiduciary, and help you discharge your duties in an efficient and expedient manner to avoid personal liability.
Our probate and trust attorney Dean Patrick has years of valuable experience helping those in the Metro-Detroit area establish, administer, and litigate trust estates. If you have questions on trusts or other estate planning matters, contact Dean E. Patrick at his Southfield, Michigan office at (248) 663-2566 or click here to arrange your consultation initial consultation.
Mr. Patrick is a licensed Michigan lawyer with a focus in probate law. He has the legal counseling skills, experience, and dedication that your legal matter deserves. Whether you are looking for a probate attorney, an estate attorney or need legal advice when dealing with these emotional issues, you can trust our office to guide you through the process and deliver results.