Trusts

Understanding Trusts in Estate Planning

A trust involves three key players: the grantor (or trustor) who establishes the trust, the trustee who manages the trust after the grantor’s death or incapacity, and the beneficiaries who ultimately receive the trust’s assets. But with various trust types available, choosing the right one for your situation is crucial. The following section will explore the two main categories of trusts: revocable and irrevocable.

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Revocable Living Trust

A revocable living trust is a way to transfer property that avoids the probate process. After creating and funding a revocable living trust, the grantor is no longer the legal owner of those possessions—the trust becomes the legal owner. However, the grantor still retains the rights to those possessions and may transfer vehicles, bank accounts, investments, real estate, and other property to and from the trust (with transactions occurring in the name of the trust).

It is also possible to add sub-trusts that function like a testamentary trust. A revocable living trust avoids the probate process, saving heirs time and money. Once the grantor passes away, the trustee makes distributions to beneficiaries according to the terms of the trust.

Testamentary Trust

A testamentary trust is established under the provisions of a will and only activates after the grantor dies. Therefore, it does not exist while the grantor is alive. Testamentary trusts are ideal for those who don’t want to create a revocable living trust but still desire control over how beneficiaries use their assets.

This trust type is useful when a beneficiary is young, has spending issues, or needs funds for specific purposes such as education or medical care. It can also protect assets from creditors or prevent them from leaving the family due to divorce or death. A testamentary trust may distribute money monthly, annually, or at specific milestones like college graduation or a certain age. One drawback is that it does not avoid probate.

Irrevocable Life Insurance Trust (ILIT)

This trust holds a life insurance policy on the grantor. Because the trust owns the policy, the proceeds are generally not taxed as part of the grantor’s estate, though they may be taxable in the beneficiaries’ estates. An ILIT can hold an “individual” or “second to die” (joint and survivor) life insurance policy. The primary goal is to minimize estate tax exposure.

Generation-Skipping Trust

This type of trust transfers assets to grandchildren or later generations tax-free. Beneficiaries must be at least 37½ years younger than the grantor. By skipping a generation, it avoids the estate taxes that would apply if the assets passed directly to children, making it a valuable wealth-preservation tool.

Spendthrift Trust

A spendthrift trust limits the beneficiary’s access to trust assets. Rather than distributing an inheritance in full, the trustee controls how and when funds are released. This structure helps protect the inheritance from irresponsible spending, creditors, and life events like divorce. The trust’s terms and timeline help ensure longevity, often supporting the beneficiary throughout their lifetime.

Special Needs Trust

These trusts are designed for dependents with physical or cognitive disabilities who rely on government benefits like Social Security Disability or Medicaid. The trust allows beneficiaries to receive supplemental income without jeopardizing eligibility for essential programs with income restrictions.

Choosing the Right Trust

Understanding which trust best suits your situation is crucial for a smooth and secure inheritance process. Harbor Law’s experienced estate planning attorneys can guide you through the legalities, answer your questions, and help you establish a plan that fulfills your wishes and protects your loved ones.

Don’t hesitate to contact Harbor Law today for a consultation and ensure your legacy is handled with care.