Trusts

Beyond the standard living trust, there are trusts designed for particular circumstances — providing for a family member with a disability, holding life insurance outside your taxable estate, or giving someone flexibility about where property ultimately goes.

What is a trust?

A trust is a legal entity that holds assets. The trust exists, but you can't see it or touch it. The document creating it is sometimes called a trust agreement or a declaration of trust.

Whatever it's called, the essential elements are the same. A trust has assets, a trustee or trustees who handle those assets, and a beneficiary or beneficiaries entitled to the assets or to income from them — either immediately or at some point in the future.

There are different kinds of trusts for different purposes: living trusts, irrevocable trusts, life insurance trusts, special needs trusts, and spendthrift trusts, among others.

Most people have a lawyer prepare a trust, because to be effective it must satisfy state and federal law, meet the specific needs of the person creating it, and account for the tax consequences.

If you're looking for information about the standard revocable trust used in most estate plans, see our Living Trusts page.

Special needs trusts

A special needs trust provides financial support to a person with a serious mental or physical disability without undermining their eligibility for government benefits such as Supplemental Security Income and Medi-Cal.

This is the central problem the trust solves. Leaving money directly to someone receiving needs-based benefits can disqualify them from those benefits — so a well-meant inheritance can leave them worse off. A properly drafted special needs trust avoids that, because the trust assets are not treated as owned by the beneficiary.

Parents often create a special needs trust for a child with a disability, but anyone concerned for that person's welfare may create one.

The person creating the trust may name anyone as trustee or successor trustee, except the beneficiary with the special needs. The beneficiary may not control the assets or revoke the trust. The trustee may spend both income and principal on the beneficiary's behalf.

Life insurance trusts

A life insurance trust is an irrevocable trust created to hold a life insurance policy. Once you transfer the policy to the trust, you no longer own it and cannot get it back.

The advantage is that the policy is no longer part of your taxable estate. For people with estate tax concerns, that can be a substantial saving.

There are three legal requirements:

The trust must be irrevocable
The insured person cannot be the trustee
The trust must be established at least three years before the death of the insured, for estate tax purposes

That three-year rule is the reason not to defer this decision. A life insurance trust created too late does not achieve the estate tax result.

Anyone with enough assets to be concerned about estate tax, and who wants to reduce it, may benefit.

Powers of appointment

A power of appointment is granted by a testator — the person writing the will — to a second person, allowing that person to decide how assets are distributed to others after the testator dies. It is usually granted in the will.

There are two kinds.

A general power of appointment allows the holder to give the assets to anyone, including themselves. For example: "I leave my art collection to be distributed as my brother Paul chooses."

A special or limited power of appointment restricts the holder to a defined group of beneficiaries and does not allow them to benefit themselves. For example: "I leave my art collection to my three children, my friend Susan Smith to determine which piece goes to whom."

The distinction matters for tax. Because the holder of a general power could appoint the assets to themselves, those assets are included in their estate for estate tax purposes — even if they never do so. A limited power avoids that result, which is why limited powers are more common in planning.

Which of these do I need?

Most people don't need any of them. The standard estate plan — a living trust, a pour over will, a durable power of attorney, and an advance health care directive — covers most situations.

These trusts address particular circumstances: a family member with a disability, a taxable estate, or a wish to give someone discretion over how property is ultimately divided.

We can tell you at a free initial consultation whether any apply to you.

Call 707.636.4611.