Common Trust Types Overview

Overview

• Speaker: estate planning attorney Paul Ramilee presenting 10 common trust types.
• Defines trust as a relationship where one person transfers assets to another to manage for beneficiaries.
• Notes overlap: trusts classified as revocable vs irrevocable and living vs testamentary.
• Emphasizes names are often informal; focus on function and terms.

Revocable Living Trust

• Purpose: avoid probate and court-involved asset freezes after death.
• Replaces a will by holding distribution terms and naming a successor trustee.
• Trustee can immediately distribute trust assets to beneficiaries without probate.

Trust For Minors (Testamentary Examples)

• Often created via a will as a testamentary trust, used when parents leave assets to minor children.
• Trustee manages assets until specified ages or milestones (example: 1/3 at 25, half of remainder at 30, rest at 35).
• Parents may grant trustee discretion to time distributions for beneficiaries' best interests.

Medicaid Trust

• Typically an irrevocable trust to protect assets from future nursing-home costs.
• Recommended setup at least five years before expected long-term care needs.
• Transfers assets out of the grantor's estate so those assets are not spent on future Medicaid-qualifying care.

Special Needs Trust

• Irrevocable trust designed to hold assets for a beneficiary receiving government benefits.
• Proper drafting preserves the beneficiary’s eligibility for means-tested benefits.

Testamentary Trust

• Terms are included inside a decedent’s last will and become effective only upon death and probate.
• No separate trust instrument exists before probate; the will itself contains the trust terms.

Spousal Trust (Credit Shelter / A-B Trusts)

• Used to provide for a surviving spouse while protecting children or other heirs from losing inheritance.
• Allows distributions to surviving spouse for health, education, maintenance, and support.
• Remaining assets at surviving spouse’s death pass to designated heirs, preventing remarriage or later actions from disinheriting original heirs.

Irrevocable Life Insurance Trust (ILIT)

• Irrevocable trust that owns life insurance on grantors, historically used for estate tax planning.
• Insurance proceeds are kept out of the grantors’ taxable estate and can fund estate tax obligations.
• Less common now due to higher estate tax exemption amounts.

Charitable Trusts (Charitable Remainder & Charitable Lead)

• Charitable remainder trust: irrevocable transfer of assets to trust, income paid to donor (often for life), remainder goes to charity.
• Donor often receives an immediate income tax deduction based on present value of future charitable gift.
• Charitable lead trust is the converse (charity receives income first, remainder to beneficiaries).

Asset Protection Trust

• Irrevocable trusts designed to shield assets from future creditors or litigation.
• Subject to numerous rules (fraudulent transfer law); must be established before claims arise.
• Used by people with professional or other liability exposure.

Crummey Trust (Annual Exclusion Funding Mechanism)

• Technique named after a court case enabling annual gift tax exclusion while funding trusts.
• Donor gives up to the annual exclusion per beneficiary into a trust but grants beneficiaries a limited-time withdrawal right (Crummey withdrawal).
• Withdrawal right provides a present interest qualification, preserving the annual exclusion while retaining assets in trust if withdrawal is not exercised.

Action Items

• Consider which trust type matches goals: probate avoidance, Medicaid planning, protecting benefits, spousal/child protection, charitable goals, or asset protection.
• Establish irrevocable trusts well before anticipated events (e.g., Medicaid needs, litigation risks).
• Ensure proper drafting (terms and timing) to preserve tax or benefit eligibility where applicable.

Decisions

• No explicit decisions recorded; guidance provided to evaluate trust choice based on personal goals and timing constraints.