United States: Beyond Setting Up Your Revocable Trust, What Other Trust Vehicles Are Out There?

When setting up an estate plan, often the most adventurous part of it is the trust. Nothing could be more exciting than that, right? Actually, there are a number of different types of trusts that may fit into your estate plan.

Gifting Trusts for Minors

Gifting Trusts are irrevocable and created under a specific section of the Internal Revenue Code, so they are known as a "Section 2503 Trust" and sometimes colloquially called an "Arm Twist Trust" (more on that in a minute). Since the trust is irrevocable, once established, you cannot change the rules. But the gifting trust allows you to set the purposes for which your gift can be used, such as education. A Section 2503 Trust is set up for the benefit of a minor, and to make sure the gifts qualify for your annual exclusion, the minor needs to have the right to withdraw all of the property upon becoming an adult.

Here is where the arm twist comes in to play. The trust agreement provides a window of time (such as 30-45 days) after turning 18 to elect NOT to take the property out. Once that election is made, the trust agreement provides that the trust is once again irrevocable. The trust provisions then usually state the property is held for the benefit of that person and becomes distributable at a certain age (for example, 30 years of age). Thus, the arm twist: if the beneficiary hopes to receive any more gifts from you, s/he would be wise to decline to take the money out at 18, so they don't lose out on a larger pay day being a part of your full estate plan.

Section 2503 trusts have become less prevalent with the rise of 529 plans since education is generally the main goal of a Section 2503 Trust. But if the intent is to use a Section 2503 Trust for purposes in addition to education, such as just growing investments for the beneficiary, it is still a useful vehicle.

Pet Trusts

Many of us have strong ties to our pets and want to ensure that, upon our death, our pets are not euthanized. "Pet Trusts" are now authorized under Ohio law. The trust terminates upon the death of the animal or, if the trust was created to provide for the care of more than one animal alive during the settlor's lifetime, upon the death of the last surviving animal.

Choice of a custodian of the pet and the trustee of the Pet Trust can be problematic, especially if the balance of the Pet Trust is to be distributed to third parties after the death of the pet. Likely it is better to have different people serving in those two capacities. The trustee would likely need to require "proof of life" of the pet as ongoing support requests are made. If one person were to serve in both capacities, and at the pet's death the remaining funds are to be sent elsewhere, there would be a temptation to not tell the world the pet has died, and just keep the funds. Separating the roles should afford protection from that risk.

Asset Protection Trusts

Asset protection trusts are designed to protect you from future, unknown creditors. The trust is irrevocable and the trustee has absolute discretion to make distributions to you or for your benefit. An Asset Protection Trust would be a consideration for a person in a career with a high risk of liability (such as a surgeon or anesthetist).

There are important considerations before establishing such a trust. If you want to set up the trust already know you have a lawsuit pending or threatened against you, a transfer to an Asset Protection Trust would likely be viewed as a fraudulent conveyance and the Trust rendered useless. When setting up an Asset Protection Trust, you would be wise not to put ALL of your assets into it, as it could appear greedy and suspicious. Most advisors suggest transferring just the "nest egg" that would be required for you to live comfortably.

How you distribute your estate is a critical process, determined by your personal situation. The flexibility these trusts offer helps to ensure that your assets are protected during your lifetime and pass easily to beneficiaries after your death.

Should you have any questions or would like further clarification on this or other tax and estate planning matters, reach out to Mansour Gavin's Estate Planning Group.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.