Summarize the purposes of a trust. What are some of the different types of trusts, and why might they be utilized?

Question

What will be an ideal response?

Answer 1

A trust is a vehicle by which property is transferred from the settlor who creates the trust to a third party trustee for the benefit of the settlor or other beneficiaries. A trust can be used to avoid probate taxes and Medicaid reimbursement if funds have been placed into an irrevocable trust for at least five years. A trust makes it more difficult for creditors to seize trust assets. A trust can name the times and purposes for beneficiaries to receive assets and also allows property to remain in the family with instructions on its use. Trusts can also be used to protect a person who, while competent when signing the trust, becomes physically or mentally incompetent. An alternate trustee can manage the assets and avoid filing for guardianship in probate court. Both education trusts and charitable trusts can be established to satisfy these areas of need.

The various types of trust are used to achieve tax benefits and to protect beneficiaries. An inter vivos revocable trust is used to avoid probate and appointment of a guardian in the event the settlor becomes incompetent.
An irrevocable trust avoids probate, and also avoids estate taxes and Medicaid reimbursement.

A Marital Deduction Trust is for extremely wealthy married couples and divides their assets into Marital and Family Trusts (A/B) used to avoid estate taxes. While there is an unlimited marital deduction for transfers made from one spouse to another during life or upon death, the resulting estate of the surviving spouse may face a large tax burden. Similar to the Marital Deduction Trust, the Qualified Terminable Interest Property or QTIP Trust provides for a surviving spouse and the distribution of the remaining trust assets on the death of the surviving spouse.

Under state statutes, funds in a minor’s trust can be excluded from the settlor’s estate and used to support the minor(s) with principal expended at certain ages. A charitable trust can be used to avoid estate taxes by placing funds distribution to qualified charities. To supplement income for a person receiving Social Security benefits, a special needs trust can be established so funds are not included in either probate or estate tax estates. A spendthrift trust can be established to protect one who allegedly will not handle financial affairs properly by granting the trustee the discretion to dispense funds. The more that distributions are in the discretion of the trustee, the more likely the assets will be beyond the reach of the beneficiary’s creditors.