Which Kind of Trust Is Right for Your Client? 9 Questions to Ask

2. Do You Want to Protect Your Assets From Creditors and Lawsuits?

Again, an irrevocable trust is viewed as an independent entity under the law, which makes it a great shield against creditors. Even after the assets in one of these trusts have been distributed to your beneficiaries, creditors have no access to them. If this is one of your chief concerns, you may want to consider a spendthrift trust, a type of irrevocable trust that allows the trustee to distribute the funds to beneficiaries but not to creditors — including the beneficiaries’ creditors.

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3. Do You Want to Provide for Minor Children?

A testamentary trust is a popular way to provide for minor children (or a relative with disabilities) whom you may not want to have full, unrestricted access to their inheritance until they reach a certain age. The testamentary trust can be set to terminate at whatever age you choose, at which point your beneficiaries are permitted to use the funds in any way they choose.

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4. Do You Want to Provide for Your Grandchildren?

A generation-skipping trust skips your children’s generation and instead provides for distributions directly to your grandchildren. There are good reasons to use this kind of trust beyond the fact that your children already have substantial assets of their own and do not necessarily need to inherit from you. If the assets bypass their generation, this can also let them avoid paying estate tax. Even if you arrange for the trust assets to skip a generation, you can still provide for the trust income to go to your children.

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5. Do You Want to Leave a Charitable Legacy?

There are two primary types of charity trusts: charitable lead trusts and charitable remainder trusts. A charitable lead trust is generally set up to exist for a predetermined period, during which the charities named in the trust receive interest payments from the principal. When the period expires, the remainder of the trust is returned to your named beneficiary. Charitable remainder trusts operate in the opposite way: They pay your personal (noncharitable) beneficiaries an income for a period of years, after which the trust’s charity beneficiaries receive the remainder of the assets.

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6. Are You Worried About What Will Happen to Your Assets if You Become Incapacitated?

When you create a revocable trust, also known as a living trust, one step will be naming a successor trustee, who will be responsible for stepping in and managing the assets in your trust if you become incapacitated. Parties such as banks, brokers and transfer agents often find it much easier to work with a trust agreement than with a simple power of attorney. Without a living trust, your family may have to go through a lengthy court proceeding to set up a conservatorship before they can get full access to your property. The successor trustee will also be responsible for distributing your assets to your heirs after you die.

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7. Do You Want to Limit the Control Your Spouse Has Over the Assets in the Trust?

With a qualified terminable interest property (or QTIP) trust, you can make sure your spouse gets all the income from the trust while limiting their right to the principal, meaning you can place restrictions on what the funds are used for and even how much can be taken out. You can also ensure that your current spouse does not get to decide what happens to any remaining funds even if they die after you do. This can be helpful for people who have had more than one spouse and complicated family relationships.

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8. Is Your Home the Most Prominent Asset You Want to Put Into Trust?

A qualified personal residence trust (QPRT) removes your residence and its value from your estate but allows you to keep using the home for a predetermined number of years. When that period expires, ownership is transferred to the trust or to your beneficiaries. But if you die before the term of the trust ends, the home will be considered part of your estate.

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9. Would You Like to Fund Your Trust With Life Insurance Proceeds?

With an irrevocable insurance trust, the trustee is the owner of your life insurance policy, with you as the insured and the trust as the beneficiary. Because the trust holds the life insurance, its value will not be considered a part of your estate. After you die, the trustee collects the life insurance proceeds and then distributes the funds to the trust’s beneficiaries, after satisfying any debts or taxes you might have.

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