Understanding different types of trusts to help meet your needs

A trust can help protect your assets, guard your privacy, minimize family conflict, and help ensure your assets are distributed according to your wishes. While many people think of trusts as only for the wealthy, trusts can be a powerful estate planning tool with potential non-financial benefits, says Maurice Quiroga, senior trust advisor for Wells Fargo Bank.

With so many types of trusts covering various wealth planning strategies, it can be difficult to determine which will best fit your needs. Here, Quiroga shares important information on one of the most common types of trusts, plus four others that might address a specific need — and help you make the right decision for your estate plan.

Revocable Living Trust

Gives you control over how and when your assets are distributed when you die or become incapacitated

This is a very common type of trust. A revocable living trust keeps the assets it contains out of probate (a public, court-supervised process that verifies your will’s authenticity, pays off any outstanding bills, and distributes your estate’s assets) and allows you to spell out exactly how you want them to be managed and distributed in the event of your incapacity or upon your death.

It’s called “revocable” because it can be revoked by the grantor (the person who created the trust) at any time. “If there’s a change in your family situation — divorce, birth of grandkids, sale of a business, loss of a family member, tax law changes — you have the flexibility to change or rewrite your document,” Quiroga says.

How it works: With the help of your estate planning attorney, you can create the revocable living trust, fund it with assets, and typically name yourself as trustee (the person who administers the trust). You also name beneficiaries and a successor trustee who will manage your affairs, according to the terms you included in the trust, if you become incapacitated or die.

“You can decide the level of controlling provisions in the governing document,” Quiroga says. For example, you could stipulate each of your children will get a specific stipend from the trust’s income every month but will have access to the principal only for higher-education costs or a health care emergency.

“Forgetting to fund a trust is one of the most common mistakes I see,” Quiroga says. Seeking the assistance of a tax advisor can help you determine which assets should be funded in the revocable living trust and coordinate beneficiary designations for those assets that pass outside the trust — for example, life insurance or retirement accounts. “A best practice is to retitle your assets in the name of the trust after it is created and when new assets are purchased.”

Other types of trusts

While revocable living trusts are flexible tools in many wealth transfer plans, those with specific needs may want to explore other types of trusts that may align with their particular situation. Consult your estate planning attorney and trust advisor about whether any of these would be a good fit for you.

Marital Qualified Terminable Interest Property (QTIP) Trust

Provides for your spouse after your death while protecting your assets for future generations

Not every surviving spouse has the time, knowledge, or interest in managing the family finances. One solution may be to establish a marital qualified terminable interest property trust. You can set up this trust, often referred to as a “QTIP,” to help ensure your spouse is taken care of for the rest of their life, while allowing you to specify what happens to the assets after they are gone. Income generated from the trust, and sometimes principal, is distributed to the spouse during their lifetime, with the remaining trust assets distributed according to rules set out in the document after they die. Trustees are responsible for managing trusts and their assets in an impartial manner, which helps protect the best interests of all beneficiaries, current and future.

QTIPs may be a good option if you have been married before and want to provide for your current spouse during their lifetime but guaranteeing your children receive their inheritance. When setting up a QTIP, your wealth strategist and tax advisor can be a good resource to help you determine whether this strategy can help lower estate taxes (and some capital gains taxes) if those are a concern.

Special Needs/Supplemental Needs Trust

Provides for a child or sibling living with a disability without jeopardizing their government benefits

If you have a child with special needs, you want to make sure there is enough money to provide for their care throughout their lifetime. However, if you leave money or property directly to your special needs child, the assets may put them at the risk of losing government benefits such as Social Security and Medicaid. A special needs trust allows you to allocate funds from a personal injury settlement, gifts, life insurance, or an inheritance into the trust without jeopardizing public support.

Irrevocable Life Insurance Trust (ILIT)

Helps keep a life insurance payout from triggering estate taxes

The estate tax limit is indexed for inflation; as of January 1, 2024, the lifetime exemption is $13.61 million per taxpayer (and twice that amount for married couples), but the limit currently is scheduled to drop back to $7 million (adjusted for inflation) per taxpayer in 2026.

If you are worried proceeds from a life insurance policy could push the value of your estate over the estate tax limit, you can set up an irrevocable life insurance trust, or an “ILIT,” to own your life insurance policy and keep the proceeds out of your estate when you die. Consult with your wealth strategist and tax advisor regarding any potential gift tax impacts of transferring a policy into an ILIT or transferring money into the ILIT to purchase a policy.

Charitable Trusts

Helps you make tax-efficient contributions to charity while still providing for your heirs

Those interested in giving back may look to trusts to help preserve their wealth while giving to charity. According to Quiroga, two common charitable trusts are a charitable remainder trust and a charitable lead trust. Each offers the option to be set up during life or established as part of an estate plan to take effect after you pass away.

If you have an asset with significant taxable appreciation, you can put it in a charitable remainder trust, which offers tax benefits, such as a charitable income tax deduction, and may help avoid capital gains taxes. The trust then has the potential to generate a stream of income you can direct to one or more beneficiaries. At the end of a specified period or when the beneficiary dies, the remaining assets are donated to the charity or charities of your choice. For example, you could set one up that, upon your death, makes annual payments to your children for 20 years; after that time, whatever is left would go to charity. A charitable lead trust is almost the opposite, Quiroga says. In the scenario above, the payments would go to the charity and the remainder to beneficiaries.

Plans for transferring wealth are personal and unique, and these are just some of your options. Be sure to align your decisions with your long-term goals. Now is a good time to discuss with your advisors at Wells Fargo Wealth & Investment Management considerations and strategies that may offer long-term planning benefits independent of short-term tax impacts.