What’s the BEST Trust for Your Estate Planning Needs?
When it comes to estate planning, trusts are powerful tools that can help individuals maintain control, protect assets, and provide for loved ones. However, understanding the different types of trusts for estate planning can feel overwhelming without the right guidance. In this article, we’ll explore four widely used trusts—testamentary, revocable living, irrevocable, and special needs trusts—and clarify how each one functions.
1. Testamentary Trusts
A testamentary trust is created through a person’s will and only goes into effect upon their death. It allows for detailed instructions on how assets should be distributed, including restrictions such as age limitations or spendthrift provisions for beneficiaries. This type of trust is helpful for parents who want to delay their child’s inheritance until a specific age or provide oversight on how funds are used.
One key consideration: testamentary trusts do not bypass probate. Because they are created by the will, the estate must still go through the probate process before the trust is established and assets are transferred.
2. Revocable Living Trusts
Among the most commonly used tools in retirement and estate planning, a revocable living trust allows individuals to retain full control over their assets during their lifetime. As the grantor, you can change the terms of the trust, add or remove assets, or dissolve it altogether.
The main advantage of this trust type is its ability to bypass probate upon the grantor’s passing. When a successor trustee is named, they can quickly manage and distribute the trust’s assets, avoiding delays and public court proceedings. However, for a revocable trust to be effective, it must be properly funded during the grantor’s lifetime.
Assets not titled in the name of the trust may still go through probate, which is why many people create what’s known as a “pour-over” will to direct remaining assets into the trust at death. Note that some assets—like real estate with HOA restrictions or vehicles—may require additional steps before being transferred to the trust.
3. Irrevocable Trusts
Unlike revocable trusts, irrevocable trusts cannot be changed or dissolved after they are created—except in rare circumstances and typically with court approval. Once assets are transferred into an irrevocable trust, they are no longer considered part of the grantor’s estate.
Why would someone consider this approach? For individuals concerned about future estate taxes or seeking protection from creditors, irrevocable trusts can help reduce the size of their taxable estate and shield assets from legal claims.
For example, placing $5 million into an irrevocable trust today removes that amount—and any future growth—from the grantor’s estate. If that investment grows to $15 million over the next 20 years, the appreciation will also be outside of the estate, potentially reducing future tax exposure.
Keep in mind: these trusts generally benefit the next generation or a spouse, and once established, assets are no longer fully accessible to the grantor.
4. Special Needs Trusts
A special needs trust, also called a supplemental needs trust, is designed to support individuals with disabilities without jeopardizing their eligibility for government assistance programs such as Medicaid or Supplemental Security Income (SSI).
Because program eligibility is based on income and assets, a direct inheritance can inadvertently disqualify the beneficiary. A properly drafted special needs trust preserves the individual’s access to benefits while allowing the trust to provide supplemental care or cover additional expenses.
These trusts can stand alone, be included as a provision in a living trust, or even exist within a will (testamentary special needs trust). However, due to the complexity of state and federal benefit programs, it’s essential to work with an attorney who specializes in special needs planning.
Why Understanding Different Types of Trusts Matters
The different types of trusts for estate planning serve varying purposes—from avoiding probate and managing distributions to protecting assets and preserving government benefit eligibility. Choosing the right trust depends on your goals, family dynamics, and financial situation.
By working with a qualified estate planning attorney and financial advisor, you can determine which strategies align with your vision for the future.
Ready to Develop a Personalized Estate Plan? We Can Help!
If you’re considering a trust as part of your estate plan, the right guidance can help you choose a strategy that fits your goals. Contact Paces Ferry Wealth Advisors to discuss your options and create a plan tailored to your family’s needs.
Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.
