A VARIETY OF TRUSTS EXPLAINED
Almost everyone has heard of trusts, sometimes in reference to someone being a beneficiary. Despite the common misconception that trusts are only for the wealthy, they are a useful tool for estate planning of all sizes. In addition to managing and protecting assets, they control distribution to beneficiaries and continue family legacies.
Types of Trusts in New York: There are many types of trusts, but they all establish a financial arrangement between three parties… the trustor(s), the trustee(s), and the beneficiary(ies). The person creating the trust is known as the trustor, grantor, or trust maker. Trusts can be created by more than one person or entity. The trustee manages the trust and disperses income or principal from the trust according to specific terms. The trust is to benefit one or more beneficiaries, which can be people or entities such as charities.
Benefits of Trusts: Trusts provide many benefits. One of the key benefits is transferring assets from the owner to the trust fund so assets do not have to go through a probate court before reaching the beneficiary.
This allows the beneficiary to receive the assets faster and privately. Probate proceedings can last for months, unnecessarily delaying the dispersal of assets. Since court records can be viewed by the public, assets become public knowledge.
A person can establish a trust that they benefit from during their lifetime. Trusts can also be used to hold and disperse assets to beneficiaries who are minors, disabled, or otherwise unable to manage the assets. Some trusts are used to remove countable assets from a person who is planning to apply for Medicaid benefits. Assets intended to heirs may prevent them from qualifying from Medicaid coverage. Trusts created for the purpose are usually established at least five years before the trustor plans to apply for Medicaid.
Types of Trusts: The most common types of trusts are living, testamentary, revocable, and irrevocable. They can be funded during or after the trustor's life depending on the purpose of the trust. These common trusts are described as follows:
Living Trusts: A living trust is set up while the trustor is still alive. The assets that are held in the living trust are available to the trustor during their lifetime. This type of trust is helpful if the trustor wants to have access to the assets but wants to give clear direction on how they will be distributed after death.
Testamentary Trust: The executor of a decedent's estate frequently establishes a testamentary trust for the benefit of the trustor's heirs. Once made, this kind of agreement is irrevocable and cannot be modified.
Revocable Trust: A revocable trust, like a living trust, is established while the trustor is still alive and desires to continue benefiting from the assets held by the trust. Following the death of the trustor, a successor trustee manages the trusts for the benefit of the beneficiaries named in the trust.
Irrevocable Trust: An irrevocable trust cannot be changed or terminated during the trustor's lifetime. Since the assets held in an irrevocable trust are off-limits to the trustor, this type of trust helps protect assets from creditors and taxes. It is often used when planning for Medicaid or government benefits. It may be used to limit access to minors and adults with special needs to distribute funds at specific times or over their lifespan.
This document is designed for general information only. The information presented on this document should not be construed to be formal legal or tax advice nor the formation of a lawyer/client relationship.
For more information on this and other topics, please contact Kevin via any of the channels listed below:
📧kevin@kmckernan.com or 📞718-317-5007