A trust is a legal agreement about how property is to be owned, managed and distributed by a named trustee. Trusts are flexible instruments and address a wide variety of situations. Trusts can be revocable (changed or terminated while you are alive) or irrevocable (not subject to change, usually for tax or asset protection purposes.) Trusts formed by wills are irrevocable upon death.
In general, trusts are formed to provide for dependents, avoid estate taxes, avoid probate, manage multiple ownership interests, or for privacy reasons. All trusts are private and so protect asset ownership and distribution information. Trusts can be expensive to form and often require separate accounting and tax filing; I recommend trusts only if you have a specific issue to address.
Here are the most popular types of trusts:
Inter Vivos (Living) Trust: Formed by a living grantor and revocable until death. It often is used to avoid to probate because trust assets are distributed by the terms of the trust rather than by will. Maine probate is a relatively quick, inexpensive process and probate avoidance is not a large concern. If the grantor is the beneficiary, I recommend these only for concerns about asset management. If the beneficiaries are others, I recommend these if a grantor wants to maintain some control over the assets.
Minor Trust: Holds assets for children, dictating the ages and terms of distributions. It usually is made by a will, and is recommended for parents of minor children or those who wish to limit distributions until beneficiaries reach certain ages.
Special Needs Trust: Provides income to a disabled person; an independent trustee makes payments to a beneficiary or pays their bills directly. In many cases, the terms of the trust limit payments so that the disabled person is able to qualify for government assistance.
Family Trust: Either inter vivos or by will, holds assets for multiple beneficiaries. The trust offers the grantor some control over how property is managed but removes it from the grantor’s estate for estate tax purposes. Useful when a grantor faces estate tax liability and/or wants to preserve property for future generations.
Credit Shelter Trust: Formed to avoid estate taxes by including certain assets in a decedent’s rather than a surviving spouse’s estate. It provides a surviving spouse with income; upon the surviving spouse’s death, the remainder goes to the children. These trusts are funded up to the Maine estate tax exemption amount (now $1 million.)
Gift Trust: Used to transfer assets for estate tax avoidance. Gifts to an inter vivos trust provide some benefits to the donor while the remainder goes to other beneficiaries. Types include Charitable Remainder Trusts (remainder gift to charity), Grantor Retained Annuity Trusts (splitting investments between donor and beneficiary), and Personal Residence Trusts (gifting a home while retaining a right to live there.) Recommended for wealthier grantors.