Whether you are just beginning your estate planning journey or seeking to expand your plans to protect your children and other beneficiaries, creating a trust might be your next step. However, there are several different types of trusts, and you should carefully consider your options when designing the correct one to protect your interests and those of your beneficiaries.
The experienced estate planning attorneys at Montagna Law are here if you need help with your will, trust, or other estate planning concerns. We can help with legal advice and guidance on deciding how to move forward to protect your family members best.
A trust is a legal document that protects the assets in your estate. The trust is a legal entity that becomes the legal owner of the property placed into it. You can use it to avoid specific levels of estate taxes and the probate process. Trusts provide additional legal protection for your assets beyond your last will and testament.
Trust assets can be added to while you are living, incapacitated, or even after you have passed. Each trust has three components: the grantor, the trustee, and the beneficiary.
The grantor is the person who creates the trust and sets the terms of the trust. The grantor is also sometimes called the trustor or settlor.
A trustee is a person who has conservatorship of the trust property and possesses a fiduciary responsibility to abide by the terms of the trust document. The trustee observes and carries out the grantor’s desires. Married couples often list each other as co-trustees. In other cases, an inter vivos trust can allow the trustor to appoint a trustee to receive benefits on the trustor’s behalf while they are still alive.
Finally, the beneficiary is the person or persons who the trustor or settlor intends to benefit from the trust assets. Beneficiaries can be minor children, family members, or any loved ones you wish.
For example, a person about to pass away may want to see their minor children protected and avoid some level of federal estate tax and probate court. They can create a trust and place some of their assets into it, appointing their surviving spouse as the trustee to manage the funds on behalf of the children, the beneficiaries, until they turn 18. At this point, the assets in the trust pass entirely to the children.
You can place any assets and real property into a trust, even real estate.
Revocability is a characteristic of a trust. That is to say, a trust can be revocable or irrevocable, depending on the type of trust you decide to set up.
An irrevocable living trust cannot be canceled or changed after being created unless the beneficiaries sign off on any modifications. Typically, irrevocable trusts are not subject to estate taxes because the trust is a legal entity that serves as the owner of the property placed into it rather than granting ownership of the property to the decedent. This change in ownership grants a degree of tax exemption. These trusts are permanent and last for the life of the trustor and beyond. Virginia state laws are very strict about challenging or amending an irrevocable trust.
A revocable trust or revocable living trust allows for changes. You can change the trustee, beneficiaries, property, any instructions for asset distribution, and even the overall existence of the trust itself. With a revocable trust, you must name a successor trustee to take over responsibility if you die or become incapacitated. Because the property in a revocable trust remains under the trustor’s ownership rather than being owned by the trust, it is subject to estate and applicable income tax. Revocable trusts can last however long you wish them to last. You can cancel them at any time. If your revocable trust lasts until you die, it becomes irrevocable under Virginia law.
Creating a trust can benefit both those with large and small estates. Some of the benefits of creating a trust in Virginia include potentially avoiding the probate process, reducing tax obligations, protecting your legacy, and helping your beneficiary loved ones receive the care and property you wish.
Because a trust can allow you to avoid probate, you can pass assets much quicker and easier to surviving loved ones. The tax shelter that a trust can provide can make passing your estate assets more cost-effective for your beneficiaries. Trusts can also set specific requirements for how assets are delivered. The typical distribution is that a particular amount of money or specific goods is provided regularly, such as annually, until the beneficiary reaches a predetermined age or condition. At this point, they get the rest.
Trusts can also provide for specific anticipated needs. For example, you can set up a trust to pay for a minor child’s future college education.
Finally, unlike your last will and testament, which is a matter of public record, a trust can protect your privacy. Trust documents are private, and neither the assets they contain nor their distribution is a matter of public record.
Under Virginia state laws, there are several types of trusts. Each has different purposes, benefits, and goals.
A charitable trust, or charitable remainder trust, is established for the benefit of a specific charity. The trustor determines how the trustee will use the assets placed into the trust to support the charity for which it is created. Charitable trusts can also protect your assets from estate or gift taxes.
Special needs trusts, also called supplemental needs trusts, are designed to provide for the needs of someone with physical or mental disabilities while protecting their eligibility for certain federal benefits such as Medicaid and social security. Normally, if a person with a disability receives a large inheritance, it could increase their income such that it may interfere with Medicaid or SSDI eligibility. A trust protects against that because the trust is the legal entity that owns the property. The trust supports the person with the disability.
Asset protection trusts are also known as spendthrift trusts. These are designed to protect the beneficiary’s assets against future claims or creditors so the assets are not squandered. Such trusts are usually deemed irrevocable for a fixed period determined by the trustor when they create the trust. After the stated period of irrevocability ends, the trust can be terminated, and the remaining assets can be returned or delivered according to the instructions within the trust.
A testamentary trust is set up by a decedent’s last will and testament after their death. These types of trusts can be simpler and more flexible to set up than many other types. You can also change them at any time up until you die. Because the trust only comes into existence after you die, however, it can also be subject to estate taxes.
A retirement trust allows you to place retirement accounts into a trust. The trust offers the tax benefits of a standard retirement account and the asset protection benefits of a trust. Retirement trusts can help assist spendthrift beneficiaries in not squandering an inheritance. This type of trust shelters against divorce proceedings, protects against lawsuits, shields assets from bankruptcy, and safeguards disability assistance.
The type of trust we see most often at Montagna Law is the spendthrift trust. This is because many parents are genuinely concerned about children squandering their inheritance quickly on luxuries and unnecessary items instead of using the money to live comfortably for as long as possible. A spendthrift trust allows a degree of asset protection and peace of mind. While supporting the beneficiaries, the trust will do so in a manner that the trustee considers responsible per the trust’s original intent.
Estate planning can be complex and filled with some of your most important decisions. Without the proper guidance, it is fraught with pitfalls and errors that can be very costly. Our estate planning attorneys can offer advice, set up trusts to protect your assets, and assist in protecting your legacy. From life insurance to trusts to power of attorney, our Hampton Roads attorneys can help your estate get passed on as you wish.
As you consider the type of trust you want to set up, our experienced attorneys at Montagna Law are here to help you make the right decisions and distribute your assets properly. If you want more information, legal guidance, or advice on trusts and estate issues, call us today at 757-622-8100 or use our online contact form to speak with a team member.
Jon Montagna received a Bachelor of Arts in Literature from American University in Washington D.C. and graduated Cum Laude from the University of Miami School of Law in 1999. Jon practices law in the Hampton Roads Virginia area.