There’s a misconception that trusts are just for the uber rich. This is not so.
If you've ever listed your spouse or child as a beneficiary on a bank account, in theory, you've just created a simple trust. This is an important point made by Madison.com in the recent article, “3 Types of Trusts That Can Cover Your Assets.” They describe three types of trusts that can help you protect your assets.
A trust is simply a device used to divide ownership of property between its legal title and its beneficial enjoyment. The trustee is responsible for managing the property and the terms of the trust will state directions for the benefit of the named beneficiary. A trust can be revocable, meaning that you can change your mind about the beneficiaries or you can even cancel the trust entirely. However, an irrevocable trust doesn't let you modify the terms, once the trust has been established. The distinction is important, because some types of trusts won't work, if you set them up with the wrong kind of revocability.
Asset Protection Trust. This trust is designed to protect money from creditors. The trust creator transfers ownership of cash or property to a trustee. The property is now owned by someone else and creditors arguably can't reach it. This type of trust must be irrevocable. Work with a trust attorney to set it up exactly the way you want before you execute it. Since not every state permits asset protection trusts, ask your attorney if this applies to your situation.
Bypass Trust. This trust is designed to help married couples avoid unnecessary estate tax liability. Each spouse creates their estate planning documents to leave property (up to the threshold of the estate tax exclusion) to the bypass trust. They then bequeath everything else that they own to the other spouse. Any property left to a spouse qualifies for a marital deduction to the estate tax. Thus, when one spouse dies, the other gets the bequeathed property tax-free. The property in the trust is covered by the estate tax exclusion, but is not subject to estate tax in the surviving spouse's estate. Therefore, as the property increases in value, it can safely grow above the exclusion amount without any estate tax at the death of the surviving spouse.
Totten Trust. The bank account set up with a beneficiary is a Totten trust. It’s used to avoid probate. Totten trusts won’t work for real property, like a house. That calls for a specialized trust.
There are also other, more specialized types of trusts that can be helpful in some situations. A spendthrift trust, for instance, can help protect money for a financially irresponsible beneficiary. A charitable trust can allow you to make charitable gifts and keep an income stream flowing to the donor. A special needs trusts lets you provide for the support of a family member receiving government benefits (like Medicaid) without disqualifying him or her based on income.
If you think that a trust might help you and your family, consult with a qualified estate planning and trust attorney.
Reference: Madison.com (August 1, 2017) “3 Types of Trusts That Can Cover Your Assets”