When it comes to estate planning, establishing the right trust can make a massive difference in safeguarding and managing your assets. A trust isn't just another financial tool — it's a legal entity that ensures your wishes for your estate are respected, your assets are distributed per your plans, and your loved ones are provided for. If you are interested in developing a trust, or have specific questions about trusts, you should also consider contacting an estate attorney or your nearest legal assistant office.
Whether you're looking to manage wealth during your lifetime, protect assets for future generations, or support charitable causes, AAFMAA breaks down the different kinds of trusts and their uses.
What Is a Trust?
A trust is a legal entity that gives a neutral third party (the trustee) the legal authority to hold and manage trust property. The trustee has a duty to ensure that the wishes of the trustor (the person who established the trust) are upheld and that assets are appropriately distributed to beneficiaries.
Think of a trust as an empty box. You fill your box with assets such as property, mutual funds, stocks, and bonds. You decide when, how much, and under what conditions — those assets will be made available to your beneficiaries.
What Are the Different Types of Trusts?
All trusts fall into one of two categories: revocable or irrevocable.
Revocable Trust
The most common type of trust is a revocable (living) trust, which is established during your lifetime and can be amended or terminated by you (the trustor) at any time. The trust is “funded” by re-titling assets owned in your name to the name of your trust. You are also the trustee and retain all rights to the property and responsibility for income earned on trust assets.
If you become incapacitated or die, a revocable trust will name a successor trustee to manage and administer your assets.
With this type of trust, you avoid the need for court proceedings after your death, such as probating a will and overseeing the distribution of your assets, which are matters of public record.
Irrevocable Trust
Unlike a revocable trust, an irrevocable trust cannot be changed or ended. In an irrevocable trust, the trustor gives up ownership rights of the assets to the trust, as stated in the trust's terms.
An irrevocable trust can be established during your lifetime as a vehicle for completing a gift short of an outright transfer and reducing your gross taxable estate. If established by your will after your death (testamentary trust), the trust may be subject to probate court proceedings. If you have property held in an irrevocable trust, you may not have to go through probate.
There are several types of irrevocable trusts:
Irrevocable Life Insurance Trust
An irrevocable life insurance trust (ILIT) holds life insurance proceeds for beneficiaries. When established during your lifetime, the trust avoids probate court proceedings, and the value of the death benefit can be excluded from your gross taxable estate.
Funding a trust with life insurance can help cover estate taxes and other expenses after death, preventing the need to sell high-value assets.
Establishing this trust requires the grantor to relinquish all rights to the property in the trust, including the determination of trust beneficiaries and the conditions under which they receive the assets.
Special Needs Trust
A special needs trust, also known as a supplemental needs trust, is created to hold assets for the benefit of a disabled individual. It allows the beneficiary to receive supplemental income without impacting their eligibility for government benefits such as Medicaid or Social Security. It’s frequently used to cover expenses such as personal care attendants, out-of-pocket medical and dental costs, physical and/or mental rehabilitation, and other related expenses. A special needs trust can be named the beneficiary or recipient of the Survivor Benefit Plan (SBP) through Defense Finance and Accounting Services (DFAS) under certain conditions.
Charitable Remainder Trust
A charitable remainder trust (CRT) enables individuals to transform highly appreciated assets into a diversified portfolio without facing immediate capital gains taxes. By setting up a CRT, the grantor or chosen beneficiaries can receive income from the trust for a set period or their entire lifetimes. Following this period, the remaining assets in the trust are given to a selected charity.
CRTs are excellent financial tools for those looking to achieve philanthropic goals while gaining economic benefits, such as potential income tax deductions and an estate tax reduction.
Charitable Lead Trust
A charitable lead trust (CLT) allows you to support a charity while potentially reducing your taxable estate. A charity receives income from the trust for a specified term, after which the remaining assets are passed on to the grantor's beneficiaries. This structure benefits those who want to support a charity immediately while preserving wealth for future generations. It also offers flexibility in how the income and remainder interest are managed, allowing you to tailor the trust to your financial and philanthropic goals.
Grantor-Retained Annuity Trust
A grantor-retained annuity trust (GRAT) is a way for people to pass on their money to loved ones while reducing the taxable value of the estate. They are particularly useful for transferring assets that are expected to appreciate significantly.The grantor puts money or investments into the trust and gets regular payments from it for a set time. After that, whatever's left in the trust, plus any extra money it earned, goes to the beneficiaries with lower taxes.
Generation-Skipping Trust
A generation-skipping trust (GST) is designed to pass wealth to grandchildren or later generations, bypassing the grantor's children. This helps reduce estate and gift taxes. By using a GST, the assets placed within the trust can grow over time without being taxed at each generational level, significantly preserving family wealth over multiple generations.
What Type of Trust Is Right for Me?
The right type of trust for you will depend on your particular needs, wishes, and assets.
To figure out which type of trust best suits your needs, ask yourself the following questions:
- What are my primary goals?
- Who will be my beneficiaries?
- What types of assets am I leaving?
- How much control do I want in the future?
- What are the tax implications?
- Who will manage the trust?
- What are the potential costs of the trust?
- How flexible should the trust be?
- What potential risks or downsides should I consider?
Why Do Servicemembers Need a Trust?
Servicemembers and their families, unlike civilians, face unique circumstances due to deployments and other factors.
Objectives for military families could include:
- Asset distribution according to your estate plan
- Protection from creditors
- Distributions to a surviving spouse
- Protecting a child’s inheritance
- Protecting assets for future generations
- Avoiding probate
- Reducing estate tax
AAFMAA Can Help
As a member of the military community, you know how your family can be impacted financially by military life events such as deployment or disability. AAFMAA understands your special circumstances and supports active duty, Veterans, retired military servicemembers, and their families with a full-service, dedicated team throughout every stage of their lives.
Contact us today to find out more about how AAFMAA can help you.
This article was originally published December 2, 2020.