What Is a Trust?
Trusts are legal tools designed for ongoing control of assets after-death, determining how property is managed and distributed. They date back to Rome (200 BC), developed further in England (1215 Magna Carta), and remain a core part of estate planning today.
Key Points:
- Trusts vs. Wills:
- Will: A legal document guiding the probate court in distributing assets after death. Becomes public, and typically needs to be wrapped up within a year.
- Trust: A legal entity that can manage assets both during life and after death, often privately, with greater flexibility and long-term control.
- A will becomes public in probate court; trusts can remain private and avoid probate.
- Trustees are owners: Trustees are the legal owners of the assets of the trust with a legal duty to execute the trust terms for the trust beneficiaries. This distinction often provides more authority than a power of attorney when working with financial institutions.
- Long-term control: Trusts can govern property for generations, and in some states, hundreds of years.
Types of Trusts
1. Testamentary Trusts
Created by your will, effective only after death.
- Assets transfer via probate; generally costs ~5% of probate estate value.
- Best for younger parents or simpler estates.
- Trustee distributes assets according to your instructions, often using HEMS rules: Health, Education, Maintenance, Support.
- Keeps assets separate from guardians’ personal property and protects them from divorce, lawsuits, or mismanagement.
When to consider:
- Minor children are beneficiaries.
- Estate is simpler, and privacy isn’t the top priority.
- Death is less likely, and the will + testamentary trust are there as a safety net.
2. Revocable Trusts
Flexible trusts you can amend anytime while alive.
- Assets are moved into the trust (“funded”) to avoid probate.
- Trustees gain full authority over trust property, where powers of attorney only allow you to act in place of someone else.
- Useful for managing assets across states, limiting distributions to heirs, and planning for aging.
- Cost-effective if estate exceeds ~$250,000. Setup costs vary: $2,000–$5,000 based on complexity.
When to consider:
- Nearing retirement
- Own multiple properties, especially if they are in different states
- Allows for a plan (or rulebook) to preserve family harmony
- Want privacy and flexible asset control.
Important: After death, a revocable trust becomes irrevocable.
3. Irrevocable Trusts
Once funded, difficult or impossible to change.
- Removes assets from your estate which is helpful for tax planning or asset protection.
- Common uses: large estates, liability protection, life insurance (via Irrevocable Life Insurance Trusts / ILITs).
- Can be designed for advanced estate planning, tax planning, or special circumstances, but generally only used by a small group of clients.
Special Types of Trusts
Special Needs Trusts
- Designed for individuals receiving government or private assistance.
- Provides care without disqualifying beneficiaries from other benefits.
- Often created as a sub-trust within a revocable trust or testamentary trust.
Tax Considerations
- Revocable trusts: Use your Social Security number; income flows through as if trust doesn’t exist.
- Irrevocable trusts: Separate tax entity; income likely does not flow back to you, income tax consequences might. Likely gift tax consequences.
- Testamentary trusts: only affect taxes after death.
Planning Tips
Break up distributions for children — consider age milestones (e.g., 30, 35, 40) to avoid financial mistakes.
- Trusts can account for potential divorces, spending habits, or special needs.
- Engage advisors early to customize your trust, not just rely on boilerplate documents.
- For Medicaid planning, irrevocable trusts may protect assets, but timing is critical (5–7 year lookback).
Takeaways
- Trusts protect, control, and guide assets beyond your lifetime.
- Choose the right trust type for your family, asset size, and goals.
- Work with advisors to design trusts that reflect your wishes, reduce legal costs, and adapt to life changes.
Learn more in the full webinar replay of Estate Planning 2.0.
Our Wealth Management team can help you choose the right trust for your family, assets, and goals. Talk to an adviser to create a personalized estate plan that reflects your wishes and safeguards your legacy. Reach out today!
Disclosures: Accel Wealth Management does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.