Trusts are legal arrangements that allow individuals to transfer assets to others while maintaining certain controls over how those assets are managed and distributed. They are commonly used in estate planning to support long-term goals such as asset protection, tax planning, and caring for family members. Although the concept can seem overwhelming at first, understanding the basic types of trusts and how they function can help you make decisions that align with your goals.
What Is a Trust?
A “trust” is a legal entity created by a person known as the “grantor” or “settlor.” The grantor transfers property or assets into the trust, which is then managed by a “trustee” for the benefit of one or more beneficiaries. The trustee must follow the instructions outlined in the trust document. Trusts can be created during a person’s lifetime or through a will after death.
What Is the Difference Between Revocable and Irrevocable Trusts?
- Revocable trusts, or “living trusts,” allow the grantor to retain control and make changes during their lifetime. They manage assets during incapacity and avoid probate, but do not protect against creditors or reduce estate taxes.
- Irrevocable trusts, once established, generally cannot be changed. The grantor gives up control of the assets, which may help reduce estate taxes, protect assets from creditors, and support long-term care planning. The assets are no longer considered part of the grantor’s taxable estate.
What Is a Testamentary Trust?
A “testamentary trust” is created through a will and does not take effect until the person passes away. The terms of the trust are spelled out in the will, and the assets must go through probate before the trust becomes active. These trusts are often used to manage inheritances for minor children or beneficiaries who may not be financially responsible. A testamentary trust can provide instructions on when and how funds are to be distributed, which can help guide beneficiaries over time.
How Do Special Needs Trusts Work?
A “special needs trust” allows assets to be set aside for a person with a disability without affecting their eligibility for government benefits. Managed by a trustee, the funds can be used for expenses not covered by aid programs, including personal care, education, and recreational activities.
What Is a Charitable Trust?
“Charitable trusts” benefit one or more charitable organizations and may offer tax advantages:
- A charitable remainder trust provides income to the grantor or another beneficiary before assets pass to a charity.
- A charitable lead trust gives income to a charity for a set time, then distributes remaining assets to other beneficiaries.
These structures support long-term giving goals while managing how and when assets are distributed.
What Is a Spendthrift Trust?
A “spendthrift trust” is intended to protect a beneficiary from creditors reckless spending. It limits the beneficiary’s access to the funds and gives the trustee discretion over distributions. This arrangement can be helpful when the beneficiary is prone to poor financial decisions or is at risk of legal judgments or divorce. The structure allows the trustee to manage the money in a way that supports the beneficiary’s long-term financial well-being without giving them direct access.
What Should Be Considered Before Creating a Trust?
Before setting up a trust, consider your goals, the types of assets you own, and the beneficiaries’ needs. Think about who will serve as trustee, as this person or entity will have a legal responsibility to follow the terms of the trust and act in the best interests of the beneficiaries.
Some trusts may be more appropriate than others depending on the situation. For example, anyone concerned about long-term care costs may look into irrevocable Medicaid asset protection trusts, while individuals focused on avoiding probate may find revocable living trusts more helpful.
Skilled Chester County Wills and Estate Lawyers at Eckell Sparks Help Clients Design Trusts That Align With Their Goals
Creating the right trust requires careful planning and clear legal guidance. Our Chester County wills and estate lawyers at Eckell, Sparks, Levy, Auerbach, Monte, Sloane, Matthews & Auslander, P.C. can determine which trust fits your needs and skillfully complete the necessary documents. For an initial consultation, call our Media and West Chester, Pennsylvania offices at 610-565-3700 or submit our online form. We proudly serve clients in Delaware County, Chester County, and Montgomery County.