There are many varieties of trusts, each with different asset protection and tax benefits. Many aspects must be considered during the planning process, including asset protection, tax, and who is to be the beneficiary and trustee of the trust. A trust that will better protect your assets may not necessarily be the best tool to save taxes. A trust for your children may look quite different from a trust designed to provide for your spouse. You will have to prioritize your wishes to choose which aspects are more important to you.

Generally, trusts are created by a Trustor (also called a Grantor or Settlor). The trustor transfers property to the trust and designates the terms for management and distribution of the property. The trustor designates who receives the income and/or assets of the trust (the Beneficiary) and the person who will manage the trust (Trustee). One of the most difficult decisions when preparing a trust can be to decide who should be the trustee. A trustee has many duties, including purchase and sale of assets, preparation of accountings, hiring of professionals, prudent investment of assets, determinations regarding when distributions should be made to beneficiaries, allocation of assets among beneficiaries, and determination of the character of distributions. It is therefore important to consider the honesty, experience and financial acumen of potential trustees. Your closest friend may not have the investment ability of a professional; however, a professional may not understand the needs of your children.

Trusts can be living (also called inter vivos), which means the trust is set up during the trustor’s lifetime. Trusts can also be testamentary, which means that the trust is activated only upon the trustor’s death. Trusts can also be revocable (can be changed or revoked by the Trustor) or irrevocable (cannot be changed or revoked). Some common trusts are listed below.

Keep in mind that there are many additional considerations for each type of trust, with differing legal, asset protection and tax consequences. Be wary of do-it-yourself one-size-fits-all kits, as well as lawyers who prepare the same documents for all situations. Such tactics can have enormous and costly consequences for your estate and may not achieve your goals and objectives. It is extremely important that you consult with a knowledgeable estate planning attorney to prepare your trust for you.

Costs of estate planning will vary substantially from attorney to attorney. It is very important that the quote for a trust includes consultations, supplementary documents, and help in getting assets transferred into the trust, since a trust without assets will NOT avoid probate. Beware of mail order trusts, or trusts marketed by nonattorneys. Each individual estate plan is unique and must be designed specifically for you. Paying for an estate plan without personally meeting with the attorney is like having surgery without the doctor in the room. Results can be disastrous, and nonattorneys have no insurance which covers errors made in the practice of law. Documents are worthless if they don’t fit your needs! We have reviewed plans which could create hundreds of thousands of dollars in unnecessary tax liability due to improper drafting. By the time liability arises, the ‘company’ may be long gone or uncollectible. Be selective in choosing the attorney who drafts your plan.

Revocable Living Trusts

Living trusts (also called revocable inter vivos or loving trusts) are commonly used to avoid the notoriety of probate and save taxes. The assets held in this type of trust can be reached by creditors. The assets will also be included in your taxable estate. While there are reasons not to use this type of trust, it can be a useful way to provide financial management for elderly or ill persons and to avoid probate.

Spendthrift Trusts

Spendthrift trusts are commonly used to protect trust assets from the beneficiary’s creditors. Ordinarily, the spendthrift beneficiary only receives income from the trust during his or her lifetime. This trust can be useful if the intended beneficiary is irresponsible, to protect the trust assets from potential creditors. The spendthrift trust must be carefully drafted if it is to provide this type of protection.

Sprinkling Trusts

A sprinkling trust grants the trustee authority to either disburse or retain principal and income for the trust duration, and thus, determines what each beneficiary will receive. A sprinkling trust can be a useful tax and asset protection device if it is properly drafted.

Insurance Trusts

Insurance trusts are usually drafted as irrevocable trusts that are specifically designed to hold life insurance. The primary purpose of this trust is usually to avoid estate taxes on the proceeds of a life insurance policy. If properly drafted, this trust can take advantage of your Generation Skipping Tax Exemption in a way that your grandchildren and great grandchildren can also receive the insurance proceeds estate tax free. If irrevocable, this trust can be a useful tax saving and asset protection device.

Qualified Personal Residence Trust (QPRT)

A Qualified Personal Residence Trust (QPRT) provides estate and gift tax benefits for a personal residence or a vacation home. Properly drafted, this trust allows you to transfer your home to your children, resulting in a current taxable gift that is a fraction of today’s value, while retaining the right to live in the home for a chosen term of years. At the end of the term of years, the house goes to your children, free from any estate and gift tax.

Charitable Trusts

Transfers to charities can be made through trusts during your life or at your death. The charitable remainder trust allows you to transfer assets to a tax-exempt charitable organization during your life and take an immediate income tax deduction for the fair market value of the contributed assets. Any generated income from the trust assets continues to go to you or your beneficiaries for a specified period of time. After the specified period of time, the property goes to the named charity. Properly drafted, this trust can be a useful asset protection device.

Charitable Lead Trust

A Charitable Lead Trust provides a charity with the benefit of income from property for a chosen term of years, and at the end of the term, the property is returned to you or your heirs.

Medicaid Trust

A Medicaid trust is a special trust designed to shelter assets so the grantor qualifies for Medicaid coverage for nursing home costs. The trust allows the grantor to continue to receive income as beneficiary during the grantor’s lifetime. There are limitations on this specialized trust. Whether assets in this trust are considered available resources depends on who created the trust, when the trust was created, and the circumstances by which the beneficiary can receive trust distributions. As with all trusts, the details of drafting are extremely important, and you must consult with a knowledgeable attorney to ensure the trust will accomplish your goals.

Foreign Trusts

Foreign trusts have gained popularity in the last decade. Generally, a creditor must file suit in the foreign jurisdiction before attaching assets held in the foreign trust. A properly drafted trust will help settle or discourage litigation, keep ownerhip confidential, and serve as a pre-nuptial agreement alternative.

Although beneficial, these trusts are not always the perfect solution. Some firms now specialize in seizing assets held in foreign trusts. In addition, you must still pay taxes on the assets held in such trusts - be wary of advice you receive to the contrary.