What is the Best Trust Option for You in Indiana?

There are many types of trusts recognized in Indiana.  Trust options in Indiana are generally the same as in other states.  The question is, what are your needs?  Thus, we will begin by looking at the difference between the two main types of trusts.

The Two Main Types of Trusts

• Revocable.  A revocable trust can be changed, modified or revoked at any time by the person creating the trust (called the settlor, grantor or trustor) during his or her lifetime.  The trust becomes “funded” once assets are transferred into it.  The assets may be real estate interest, chattel or personal property, investment or deposit accounts, business interests, life insurance policies, etc..  The assets deposited remain assets of the trustor up until his death, however, so taxes and other obligations incident to ownership of those assets remain in the trustor.
• Irrevocable.  An irrevocable trust is one that the person creating it cannot modify without permission of the beneficiary(s)( also called grantees).  Most types of assets can be placed into an irrevocable trust, and once transferred they become assets of the trust.  The trustor loses all control over those assets.  The main advantage that people choosing an irrevocable trust enjoy is creation of a safe haven for their assets from the reach of their creditors, even Medicaid.  There are often tax advantages to transferring certain amounts of assets to an irrevocable trust, as well.  Because the tax advantages and disadvantages are complicated, a lawyer should be consulted before opting for an irrevocable trust.

What is the purpose of a trust?

A trust is usually used as a substitute for a will that enables a trustor: 1) to decide how his or her assets will be managed before his or her death, after death or both; 2) to choose who will be his or her beneficiaries; 3) to make his or her end of like directives and assets management decisions in the event of incapacitation; 4) to give some amount of protection to assets from creditors, and: 5) to take advantage of some of the tax benefits trusts can offer.  

What are the advantages of a trust?

Both types of trusts offer the benefits of the ability to 1) pass on assets without having to go through probate, 2) set aside assets for a special needs child or beneficiary, 3) set conditions on the ability of a beneficiary to inherit through the trust, 4) create a plan for management of your assets in the event you become incapacitated, 5) obtain a certain amount of protection from creditors, depending on the type of trust you choose and whether or not you include a “spendthrift clause” in the trust, and 6) take advantage of estate tax and gift tax exemptions and other related tax laws.

What are the disadvantages of a trust?

The tax implications of a trust are complex and depend on many factors.  There are tax advantages to be had with most types of trusts, but there may also be some unintended tax consequences if the trust is not properly tailored.  Additionally, with an irrevocable trust, the trustor forever relinquishes any ownership interest and control over everything that is placed in the irrevocable trust.

Why would someone create a trust?

Many people who want asset protection and self-directed finances during periods of incapacity or after death choose a trust.  Some simply want to take advantage of the estate tax loopholes that certain trusts offer (See “A” & “B” Trusts, below).  Another reason might be that a trustor has an intended beneficiary who is unable or unwilling to properly manage assets that the trustor wishes to gift to the beneficiary when the trustor passes.  In this case, a trust establishes a body of assets set aside for the beneficiary that can be managed for that beneficiary by a capable and responsible trustee of the trustor’s choosing.  Another reason one might set up a trust is a case in which a trustor is becoming incapacitated and knows that he or she will need Medicaid assisted care.  However, the trustor owns too many assets to qualify for Medicaid coverage.  In this case, the trustor might want to create an irrevocable trust to settle affairs in advance of passing on and, as a result, the trustor becomes Medicaid eligible during his or her final illness.  These are only two examples of the many reasons one might want to create a trust.  

How do you start a trust?

Different types of trusts in Indiana are created in different ways.  For example, a custodial trust (otherwise known as a Transfer on Death Instrument or TODI) is created by using language in the title, deed or other ownership document that clearly expresses the trustor’s intent that the property is titled in his or her name as custodian with a beneficial interest in favor of the intended beneficiary.  Other types of trusts are created in an entirely different way and, if done right, will include all of the details that the chosen type of trust and trust assets require—like the designation of someone other than the trustor as trustee, possibly a “spendthrift clause,” etc..  So, the best answer to the question, “how do you start a trust?,” is talk to a lawyer about what your needs are.  

Do you need an attorney to start a trust?

Unless you know what type of trust you need, how to draft it, how to properly execute it and what to do with it once you’ve created it, you do need a lawyer.  

What is the best type of trust to have?

The answer to this question depends on what you want the trust to do.  Following is an overview of some different types of trusts.

SPECIAL TYPES OF TRUSTS

• Totten Trust—A Totten trust, also called a “payable on death account,” transfer on death document (TODD)” or “transfer on death instrument (TODI)” is a way in which to hold title to property that allows the testator to have title and possession during his or her lifetime, but to name a beneficiary to whom title to the property automatically passes upon the testator’s death.  The property remains that of the testator during his or her lifetime and can be revoked or changed at any time prior to death.  
• Testamentary Trust—A testamentary trust is set up within the provisions of a last will and testament.  Once the will is admitted to probate, the trust assets as set forth in the will are transferred to the trust and the beneficiaries of the trust must abide by the terms set forth in the trust to obtain their distribution.  Typically, this type of trust does not offer the benefit of avoiding probate because the last will and testament will likely need to be proved valid by the probate court prior to asset distribution to the trust, but it does give the trustor control over when and how the beneficiaries will obtain the trust assets.
• Spendthrift Trust—A spendthrift trust is created for a beneficiary that is unable or unwilling to properly handle finances.  The trustor names a dependable trustee capable of managing the assets for the beneficiary and sets parameters within which the trustee may and may not disburse income or assets to the beneficiary.  For example, one provision of this type of trust might be that the beneficiary is only to have disbursements from the trust for provable living or educational expenses.  
• Blind Trust—A blind trust is managed and operated by the trustee with no knowledge or input of the beneficiaries.  This type of trust is useful for estates in which conflict and disagreement among the beneficiaries is likely.  It can also be used to prevent any allegations of beneficiary “conflicts of interest” (i.e. politicians or judges often use blind trusts to avoid an appearance of financial interest, bias or conflict of interest between their finances and their career).
• Special Needs Trust—A special needs trust is set up for a dependent with special needs, like a child, parent or disabled family member.  The provisions of the trust are to provide for the day-to-day expenses and medical care of the dependent not covered by other sources, while keeping the principal assets of the trust out of the dependent’s reach.  The purpose of this trust is to provide for the uncovered needs of the dependent, while maintaining eligibility for government benefits.

• Life Insurance Trust—An irrevocable life insurance trust is created to hold the benefits of the trustor’s life insurance proceeds for the beneficiaries while never making the proceeds part of the trustor’s estate, thereby avoiding estate taxes.  The trust is named as the beneficiary of the life insurance proceeds.  The trustee then invests or distributes the proceeds for the beneficiaries in order to avoid the beneficiaries having to pay estate taxes on the distributions.
• Generation-Skipping Trust—A generation-skipping trust is designed to transfer assets to the trustor’s grandchildren, skipping the children as beneficiaries.  The trust is designed so that the grandchildren do not have to pay any estate taxes.  If the trustor choses, he can allow his or her children to access income generated by the trust assets, while placing the actual trust in the grandchildren.
• Marital Trust (or “A” Trust)—A marital trust is a revocable trust that passes all assets to a surviving spouse, who does not have to pay inheritance tax.  When the assets from the trust pass from the surviving spouse to his or her heirs.  Estate tax will be levied on those heirs.
• Credit Shelter Trust (By-Pass Trust or “B” Trust)—With a “B” Trust assets from the deceased spouse’s estate are transferred to an irrevocable trust for the benefit of heirs other than the surviving spouse and managed by a trustee.  The assets transferred are never actually owned by the surviving spouse, but the spouse can receive income generated by the assets until his or her death.  Upon the death of the surviving spouse, the assets in the “B” trust go to the beneficiaries named in the irrevocable trust without taxation, as the trust was fashioned to total at or about the estate tax exemption amount.
• “A & B Trust”—An “A” & “B” Trust is a combination of an “A” Trust and a “B” Trust.

• Crummery Trust—The Crummery Trust is named after the Crummery case 397 F.2d 82 (9th Cir. 1968).  This type of trust allows a trustor to make a gift in trust up to the existing gift tax exemption, but the gift must be specially worded to make sure that the gift is clearly intended for present use and follows specific procedures which should be set out in the trust.
• Qualified Personal Residence Trust (QPR Trust)—A QPR Trust is designed to assist in the transfer of residential property of the trustor to beneficiaries at minimal valuation.  The residence is placed in trust for a set amount of time, reserving the right to reside in the property in the trustor, which reduces the value of the residence below its market value for gift tax purposes.  After the term set out in the trust expires, the trustor can remain on as a tenant of the beneficiaries, but the value of the home and its appreciation are removed from the trustor’s estate.  
• Qualified Terminable Interest Property Trust (QTIP Trust)—A QTIP Trust is designed to pass portions of the trustor’s estate to beneficiaries at different times.  For example, a trust might be established to allow the surviving parents of the trustor to have their living and medical expenses paid for them during their lifetime from trust income, with remaining income from the trust going to a surviving spouse during his or her lifetime.  The principal of the entire trust might be kept out of reach of the parents and spouse, so that the principal remaining upon their deaths can then go to the trustor’s surviving children.
• Asset Protection Trust (APT)—An APT is an irrevocable trust set up specifically to protect assets from creditors, legal disputes, taxation, divorce, bankruptcy or other attachment or in order to lower the trustor’s net worth.
• Charitable Trust—A charitable trust is typically created to either 1) give certain of the trustor’s assets to a charity of his or her choice annually upon death until a certain date upon which the remaining assets go to a non-charitable beneficiary in order for the beneficiary to take the tax benefit of the charitable contributions against the estate tax levied (a lead trust) or 2) for the trustor to receive annuity income from certain assets placed in trust for a charity during his or her lifetime, leaving the principal assets to the charity upon death of the trustor (a remainder trust).

What if I obtain assets after I create my trust?

Anyone who chooses to establish a trust should consider the possibility that they may come into assets that they had no way of knowing they would acquire (e.g. a wrongful death lawsuit settlement) or that they simply forget to transfer all property into the trust.  For this reason, it is always a good idea to consider a Pourover Will as a companion testamentary document to the trust.  The Pourover Will can make the trust the beneficiary of all assets existing in the trustor’s estate that are not specifically identified in the trust document.

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