8 Ways to Use Trust Accounts to Your Advantage

Learn how to use trusts for estate planning.

Perhaps a friend or family member has suggested that you create a trust, which might prompt the question, “What is a trust fund?” or “What is an irrevocable trust?” Trusts can protect your assets from creditors, protect you and your family from taxes, protects money you set aside for charitable donations and ensure your finances are in order after you die.

8 Types of Trust Accounts

You might know you need to create an estate plan to reap the benefits of a trust, but need guidance in getting started. Keep reading to learn about the difference between a revocable versus irrevocable trust and discover how to use trusts for your financial plan. Here are eight ways to use trust accounts:

1. Revocable Trusts

Revocable trusts, sometimes referred to as revocable living trusts, living trusts, or inter vivos trusts, refers to trusts that the grantor can amend at any time. Revocable trusts are commonly used in estate planning because assets that are owned by the revocable trust do not have to pass through probate upon the grantor’s death. Instead, the trust becomes irrevocable after the grantor dies, and the successor trustee appointed in the trust document distributes the property according to the terms of the trust. Revocable trusts do not protect assets or shield them from income or estate taxes because the assets owned by the revocable trust are treated as if they were owned by the grantor of the trust.

RelatedWhat to Do If You Become the Executor of Your Parent’s Will

2. Irrevocable Trust

Irrevocable trusts are trusts that cannot be changed in the future. These trusts might exclude the assets from estate tax or protect those assets from creditors, depending on how the trust is set up. But the person who contributed the assets to the trust no longer owns them and generally cannot take them back out of the trust if he or she needs them. Keep reading to learn about the many uses for irrevocable trusts.

3. Testamentary Trust

Testamentary trusts are trusts that are created upon someone’s death, such as a trust created under a will. While you are alive, you are free to change the terms of the testamentary trust by amending or redoing the document — typically a will — under which the testamentary trust is created. After you die, the terms of the testamentary trust become irrevocable. For example, if you have young children, you might include terms for a testamentary trust for money passing to your children, so that someone else is appointed to manage it on their behalf until they reach a certain age.

4. Asset Protection Trust

Until recently, most wealthy individuals opted to create asset protection trusts in foreign jurisdictions such as the Cook Islands to prevent U.S. courts from having jurisdiction over the assets. But 17 states now offer domestic asset protection trust statutes that allow you to create a trust that is protected from future creditors.

Asset protection trusts are only good against future creditors — if you already have creditors who have claims against you, the transfer of assets to the trust can be deemed to be in fraud of those creditors and the trust can be unwound. In addition, depending on state law, certain debts, such as alimony and child support, might still be paid from asset protection trusts.

5. Special Needs Trust

For beneficiaries who receive Medicaid or Supplemental Security Income benefits, an outright bequest of money would render them ineligible for benefits until the money had been spent. Rather than simply replace the government benefits, most people leaving money to a special needs beneficiary would prefer that the benefits be used to supplement those government benefits. To prevent the bequest from being treated as an available asset, the money must be left in a special needs trust, which contains specific provisions that prevent those assets from disqualifying the beneficiary from receiving the benefits. Different rules apply, depending on whether the special needs trust is being funded with the special needs beneficiary’s own assets or a third party’s, such as a parent’s, assets.

Also: Social Security Changes to Watch for This Year

6. Charitable Trust

Charitable trusts have a charitable beneficiary as well as individual beneficiaries. Typically, charitable trusts are either charitable lead trusts, where the charity receives payments for a certain period of time and the remainder passes to individual beneficiaries, or charitable remainder trusts, where individuals receive payments for a certain period of time and the remainder passes to charity. You could use a charitable remainder trust if you need to guarantee that you will receive a certain amount each year for the rest of your life, but want whatever is left to pass to a charity when you die. Charitable trusts can reduce income taxes and estate taxes.

7. Totten Trust

A Totten Trust is just a fancy name for a bank account with a payable-on-death, or POD, designation. A POD designation on an account names the person or persons who will receive the remaining funds after the primary account holder dies. The primary account holder can change or revoke the POD beneficiary at any time. But after the primary account holder dies, the account goes straight to the named beneficiary without having to go through probate. The name “Totten Trust” comes from an old New York court case that first allowed them.

Related: How to Choose a Beneficiary for Your CD Accounts

8. Credit Shelter Trust

A credit shelter trust is a trust created to reduce estate taxes and control where the assets of the trust ultimately end up. It’s structured so that the trust assets are excluded from the taxable estate of the beneficiaries. The credit shelter trust can also ensure that the assets of the trust pass to specified people upon the death of the first beneficiary. These are especially common in the estate plans of blended families. A husband might want his money to be held in trust for his wife during her life and have any remaining money go to his children from a prior relationship after his wife dies.

How to Open a Trust Account

Creating a Totten trust simply requires a trip to your bank to fill out some paperwork. Other revocable and irrevocable trusts are a bit more complex to set up and fund. If you have a very straightforward estate, an online form might be sufficient for your needs, although you run the risk of executing it improperly and having the documents deemed invalid. For more complex estates, the assistance of an attorney can be key, both in drafting the documents and reducing the chances of litigation over the estate plan. Plus, you don’t know what you don’t know. An attorney who specializes in estate planning might be able to suggest estate planning options that you didn’t even know existed.

Up Next: Living Trust vs. Will — Which Is Right for You?