There are different types of trusts that serve specific purposes based on a family's situation. We start with the revocable living trust - the foundation of any estate plan. First, it avoids probate if properly funded and second, it provides protection should the trustee become incapacitated.
What if there is a child (whether it be a minor or adult child) that has a disability (a “special needs” person)? If a special needs person were to receive an inheritance, it may render them ineligible for valuable government benefits such as Medi-Cal. The solution is for the parents to create a Special Needs Trust that protects disabled beneficiaries or even a surviving spouse. The disability may be schizophrenia, cerebral palsy, severe autism, or Alzheimer’s. They may be unable to work.
Remember, Medi-Cal is a needs based program. If a special needs person inherits a great deal of money, he or she will not qualify for Medi-Cal or SSI or worse yet, may be disqualified from receiving benefits they had been receiving. As a result, his or her inheritance will be spent down quickly if they need ongoing healthcare. If the inheritance had gone into a special needs trust the asset would not be considered their asset for purposes of qualifying for government benefits. A fiduciary acts as the trustee who hopefully understands these benefit programs and is permitted to use assets to supplement or enhance a special needs person life. For example, a trustee may purchase a home for the special needs person. Or if he or she lives in a group home, the trustee may pay for a single room.
Next we have the spendthrift trust. It’s similar to a special needs trust. This is for beneficiaries who don’t manage money very well and/or have a drug and alcohol problem. A spendthrift trust protects the beneficiary from their own reckless behavior and preserves assets. The parents can specify the scheduling of distributions, the amount and under what conditions the trustee may make distributions. There may be provisions where the trustee may require a blood test before authorizing a distribution if they suspect alcohol or drug abuse. Then the trustee can require rehabilitation before any further distributions can be made.
The “IRA Inheritance Trust” – is what we call a living trust for retirement accounts. Understand that typically we don’t want a living trust to own retirement accounts (e.g. IRA’s, 401(k)’s, etc.) unless there is a beneficiary who is a minor. Otherwise, the tax deferral advantages will be lost. But again, what if you have an adult child who doesn’t manage money well? We offer the IRA Inheritance Trust as a solution. This trust was specifically approved by the IRS. This trust not only protects the adult child’s share from mismanagement – it also protects the “stretch out” of each beneficiary’s share over their lifetime (although current legislation known as the SECURE Act may radically change the “stretch out rules” - learn more here). Beneficiaries (even responsible ones) often make the mistake of cashing out their share of the retirement account proceeds, not realizing that a tax will be due as a result. Furthermore, there may be a loss of hundreds of thousands of dollars that could have accrued over their lifetime had they kept the rollover IRA intact.
Then there is the Personal Asset Trust. This is an asset protection trust for beneficiaries. This trust provides protection against creditors, judgments, and the biggest threat of all – divorcing spouses. What if your adult child is in a high-risk occupation, such as a physician or is an owner of rental properties? A personal asset trust is the smart choice.
The Medi-Cal Asset Protection Trust is a very sophisticated trust and is an invaluable tool that we use in Medi-Cal planning.
We have the Bridge Trust for those who want asset protection for themselves. This is a very unique, sophisticated asset protection trust.
As you can see, there are many different types of trusts that serve different purposes. Every family's needs are different. We design estate plans that serve the unique needs of our clients.