Trusts are created for a number of reasons, primarily for the purpose of keeping property, whether it be real or personal, tangible and intangible, for the benefit of another individual. There are multiple types of trusts, each designed to fulfill a specific need and outcome. There are Special Needs Trusts, Credit Shelter Trusts, Revocable and Irrevocable Trusts, and Testamentary Trusts. In order to determine what type of trust you may need or be interested in, consult one of the attorneys at Byrd & Byrd.

Credit Shelter Trusts

A Credit Shelter Trust, sometimes referred to as a bypass trust, allows a married individual to reduce estate taxes when passing on their assets to designated heirs. In such a trust, it is prearranged that when the surviving spouse passes away, the assets are transferred to the beneficiary (or beneficiaries) named in the trust. One typical stipulation with credit shelter trusts is that the surviving spouse retains the rights to the income generated from the trust for the remainder of his or her life.

Revocable and Irrevocable Trusts

Revocable Trusts

Revocable or “living” trusts allow complete control to the person creating the trust, often called a trustor, creator, settlor, grantor, founder, or donor. The trustor may change, revoke, or terminate the trust at any time and take back the funds. These trusts can be very useful in allowing a trustor to reap the benefits of a trust while maintaining the power to change it at any time before death. Revocable trusts are generally used for asset management, probate avoidance, and estate tax planning; however, revocable living trusts will not protect your assets from lawsuits, or if you have to qualify for government benefits in order to pay for long term care. Revocable trusts are not used for Medicaid planning or asset protection.

Irrevocable Trusts

Irrevocable trusts generally cannot be terminated and can only be changed in limited ways after they are created. Any assets transferred to the trust may only be used or distributed by the trustee as dictated by the terms of the trust document. Although the trustor may be entitled to receive income from the trust, the trustor does not have the right to the principal in the trust. This type of trust is often used for the protection from potential creditors or for Medicaid planning purposes.

Special Needs Trusts

A Special Needs Trust (“SNT” or Supplemental Needs Trust) provides for a disabled person’s needs based on the decisions and discretion of the trustee. An SNT is typically used to help support a disabled person eligible for government financial aid. To avoid impacting government aid eligibility, SNTs are typically set up to pay for their needs above and beyond what the government benefits cover (e.g. food, shelter, or clothing). This can include luxuries; travel and transportation; housekeeping; personal and professional services; telephone & internet; legal expenses; expenses for family visits; funeral costs.

SNTs are typically set up by a parent or grandparent who does not have a legal obligation to support the disabled person. However, a disabled person can self-settle a SNT for their own benefit. These SNTs are typically irrevocable and provide that amounts remaining in the SNT when the disabled person dies will repay Medicaid for any incurred expenditures. Estate planners, or personal injury attorneys representing a disabled person, need to consider the financial impact of inheritances or injury settlements on their client’s government aid eligibility.

Testamentary Trusts

A testamentary trust is one created by a person in their Last Will & Testament which becomes effective only after that person has died. Although a testamentary trust will not avoid probate, it can be useful in reducing estate taxes for married individuals, managing assets given to a minor child, or providing for the care of a disabled individual.