Here’s something that most people don’t know: if you listed your spouse or a child as a beneficiary on a bank account, from a technical standpoint, you have created a simple trust. A recent article from Madison.com, “3 Types of Trusts That Can Cover Your Assets,” offers some practical information on three basic kinds of trusts that are commonly used by regular people in estate planning.
A trust is simply a device that is used to divide ownership of property between its legal title and its beneficial enjoyment. The trustee is responsible for managing the property and the terms of the trust will state directions for the benefit of the named beneficiary. A trust can be revocable, which means that you can change your mind about the beneficiaries or you can even cancel the trust entirely. However, an irrevocable trust doesn't let you modify the terms once the trust has been established (except in limited circumstances and, hopefully, only with the advice and counsel of a lawyer). The distinction is important, because some types of trusts won't work if you set them up with the wrong kind of revocability.
Asset Protection Trust. This trust is designed to protect money from creditors. The trust creator transfers ownership of cash or property to a trustee. The property is now owned by someone else and creditors arguably can't reach it. This type of trust must be irrevocable. Work with a trust attorney to set it up exactly the way you want before you execute it. Since not every state permits asset protection trusts, and since courts often (and often accurately) attribute bad motives to asset protection trusts, ask your attorney if this applies to your situation.
Bypass Trust. This trust is designed to help married couples avoid unnecessary estate tax liability. Each spouse creates their estate planning documents to leave property (up to the threshold of the estate tax exclusion) to the bypass trust. They then bequeath everything else that they own to the other spouse. Any property left to a spouse qualifies for a marital deduction to the estate tax. Thus, when one spouse dies, the other gets the bequeathed property tax-free. The property in the trust is covered by the estate tax exclusion but is not subject to estate tax in the surviving spouse's estate. Therefore, as the property increases in value, it can safely grow above the exclusion amount without any estate tax at the death of the surviving spouse (though the assets of the bypass trust will be subject to capital gains taxes upon the sale of the assets).
Totten Trust. The bank account set up with a beneficiary is a Totten trust. It’s used to avoid probate. Totten trusts won’t work for real property like a house. That calls for a specialized trust.
There are a number of other kinds of trusts designed for more specific situations. A charitable trust is used to make charitable gifts and create an income stream. A spendthrift trust is just what it sounds like: protecting assets for someone who cannot control their spending. A Special Needs Trust (SNT) is created to allow a family member to continue to receive government benefits, without being disqualified because of income levels.
A knowledgeable estate planning and trust attorney can help you to determine what kind of trust is best for your family’s situation.
Reference: Madison.com (August 1, 2017) “3 Types of Trusts That Can Cover Your Assets”