Are you familiar with trusts? Rudman Winchell Attorney and Partner, Kristy Hapworth, recently presented at the 2023 Trust & Wealth Management Conference in Freeport, sponsored by the Maine Bankers Association. During her presentation, Kristy spoke about the benefits of trusts for clients with moderate wealth. We’ll provide a summary of her expertise, focusing on different types of trusts and how they can help you safeguard your assets. Please note that while this information is valuable, it is not legal advice but rather general educational material.
Understanding Trusts
Let’s start with the basics. A trust is a legal arrangement between a person, known as the grantor, and a trustee. The trustee agrees to manage assets on behalf of one or more beneficiaries. To make things clearer, here are a few terms you should know:
- Grantor: The person who creates and contributes assets to the trust.
- Trustee: The individual responsible for holding and managing the trust’s property.
- Beneficiary: The person who receives the economic benefit from the trust.
Types of Trusts
Trusts come in various types, each with its own distinct characteristics and purposes. There are four main types of trusts that you should be aware of:
- Revocable Trusts: These trusts allow the grantor to change or cancel them as they see fit. The grantor retains control over the trust assets during their lifetime.
- Irrevocable Trusts: In contrast to revocable trusts, irrevocable trusts cannot be altered or revoked by the grantor once they are established. The assets placed in an irrevocable trust are typically removed from the grantor’s estate.
- Grantor Trusts: With grantor trusts, the grantor is considered the owner of the trust assets for income tax purposes. This means that the grantor is responsible for reporting income and paying taxes on the trust’s earnings.
- Non-Grantor Trusts: Non-grantor trusts, on the other hand, are separate entities for tax purposes. The trust itself is responsible for reporting income and paying taxes.
In addition to these types, it’s important to understand the distinctions between first-party trusts and third-party trusts. First-party trusts are created by the beneficiary, who also acts as the grantor. On the other hand, third-party trusts have beneficiaries who are not the grantors.
Furthermore, testamentary trusts are established under the grantor’s last will and testament and come into effect after their passing. In contrast, inter vivos trusts are established during the grantor’s lifetime.
Understanding these distinctions will be crucial in selecting the most suitable trust for your specific needs.
Common Trust Purposes
Although trusts are commonly associated with the wealthy, trusts serve a variety of purposes beyond estate tax planning. In this section, we will delve into the different reasons why trusts may be valuable for individuals with moderate wealth.
Avoiding Probate
If you have assets located in more than one state or have many potential natural heirs, a Revocable Living Trust (RLT) can help. By placing your assets in an RLT during your lifetime, the assets won’t be subject to probate upon your death. Ancillary probate in various jurisdictions can be avoided, and only the beneficiaries of the trust – rather than all of your natural heirs – need to be notified of the administration of the trust.
Legacy Property Planning
Suppose you want to preserve specific property for your loved ones. In that case, a Family Camp Trust or a similar arrangement can ensure that your property is used and maintained according to your wishes, even after your death.
Protecting Assets from Creditors and Predators
Trusts can shield your assets from creditors and individuals who might try to influence your beneficiaries. By establishing a third-party trust with features like discretionary distributions, independent trustees, and spendthrift clauses, you can provide greater protection of your beneficiaries’ inheritance.
Safeguarding Assets for Spendthrifts
If you have concerns about beneficiaries who may struggle with financial responsibility or face challenges like addiction or mental illness, a third-party trust with an independent trustee can provide the protection necessary to protect the beneficiaries’ inheritance from mismanagement.
Long-Term Care Planning
If you want to protect your assets from the costs of long-term care, an Asset Protection Trust can help. By placing your assets in this irrevocable trust, you can rely on Medicaid to fund the costs of your long-term care while ensuring the trust assets won’t be subject to estate recovery after your passing.
Special Needs Planning
Special Needs Trusts are designed to provide for individuals with disabilities without jeopardizing their eligibility for means-tested public benefits. By creating a Third-Party Special Needs Trust or a First-Party Special Needs Trust, you can support their needs while safeguarding their benefits.
Attorney Kristy Hapworth’s presentation on the benefits of trusts for mid-net worth clients highlighted the importance of understanding different trust types and their purposes. Trusts can help you avoid probate, plan your legacy, protect your assets from creditors and predators, safeguard resources for spendthrifts, plan for long-term care, and provide for loved ones with special needs. Remember, it’s always best to consult with a legal professional to receive personalized advice regarding trusts and their implications.