Charitable Trusts

A tax-exempt irrevocable trust designed to reduce the taxable income of individuals by first dispersing income to the beneficiaries of the trust for a specified period and then donating the remainder of the trust to the designated charity.

The whole idea of a charitable remainder trust is to reduce taxes. This is done by first donating assets into the trust and then having it pay the beneficiary for a stated period. Once this timeframe expires, the remainder of the estate is transferred to the charities deemed as beneficiaries.

Court-Appointed Trusts

A court-ordered trust, also called a Type “A” special needs trust, is used only for special circumstances, such as where the person with a disability has inherited money or received a court settlement. The “A” comes from the last letter of the federal statute, 42 U.S.C. § 1396p (d) (4) (A).

Because the disabled person owns the money, the funds cannot be put into the usual special needs trust that parents usually set up.

Only certain people are allowed to set up this type of trust:

  • The disabled person’s parent
  • The disabled person’s grandparent
  • The legal guardian

To qualify, the disabled person must be under 65 years old and meet the medical standards of Social Security, in terms of the disability. Someone who is not disabled enough to qualify for Social Security cannot have this type of trust.

The trust must specify that after the disabled person has died, anything left over will pay back the State of residence for whatever medical assistance the government provided to the individual after the trust was set up.

Family Trusts

A family trust is a trust set up to benefit members of your family. The purpose of the family trust is for you to progressively transfer your assets to the trust, so that legally you own no assets yourself, but for you, through the trust, to still have some control over, and get the benefit of, these assets.

Revocable Trusts

A trust whereby provisions can be altered or canceled dependent on the grantor. During the life of the trust, income earned is distributed to the grantor, and only after death does property transfer to the beneficiaries.

This type of agreement provides flexibility and income to the living grantor; he or she can adjust the provisions of the trust and earn income, all the while knowing that the estate will be transferred upon death.

Life-Insurance Trusts

An irrevocable trust set up with a life insurance policy as the asset, allowing the grantor of the policy to exempt asset away from his or her taxable estate.

Once the life insurance policy is placed in the trust, the insured person no longer owns the policy, which will be managed by the trustee on behalf of the policy beneficiaries when the insured person dies.

The insurance trust, or irrevocable life insurance trust (ILIT), is often used to set aside cash proceeds that can be used to pay estate taxes, as the life insurance policy should be exempt from the taxable estate of the decedent.

Testamentary Trusts

A legal and fiduciary relationship created through explicit instructions in a deceased’s will. A testamentary trust goes into effect upon an individual’s death and is commonly used when someone wants to leave assets to a beneficiary but doesn’t want the beneficiary to receive those assets until a specified time. Testamentary trusts are irrevocable.

For example, a parent might create a testamentary trust to leave assets to their minor child so that the child would not receive the assets until he or she became an adult and could manage them responsibly. A trustee will manage the testamentary trust’s assets until the beneficiary receives control of them.

Tax-Sheltered Trusts

Tax Shelters are any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments. The methodology can vary depending on local and international tax laws.

Special Needs Trusts

A legal arrangement and fiduciary relationship that allows a physically or mentally disabled or chronically ill person to receive income without reducing their eligibility for the public assistance disability benefits provided by Social Security, Supplemental Security Income, Medicare, or Medicaid.

It covers the percentage of a person’s financial needs that are not covered by public assistance payments. The assets held in the trust do not count for the purposes of qualifying for public assistance, as long as they are not used for certain food or shelter expenditures. Assets originally belonging to the disabled individual that are placed into the trust may be subject to Medicaid’s repayment rules, but assets provided by third parties such as parents are not. Also called “supplemental needs trust”.

When a third party puts money in a special needs trust, it is ensured that the money will be used for its intended purpose. For example, parents might put assets in a special needs trust to provide for their disabled daughter instead of giving that money to their son. Special needs trusts are irrevocable, and their assets cannot be seized by creditors or by the winner of a lawsuit. This type of trust must be properly worded to ensure its validity and must be established before the beneficiary turns 65.

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