The mention of trust funds may evoke thoughts of privileged children from wealthy families in the minds of New York residents, but trusts can be extremely useful estate planning tools even for those of more modest means. While the affluent do use trusts to reduce their estate tax exposure and transfer generational wealth, they are most commonly drafted to avoid probate, protect assets from creditors, prevent children from inheriting large sums of money at a young age and to ensure that heirs continue to qualify for federal benefits like Medicaid.
A trust is essentially an agreement under which the trustor gives property to the trustee to hold on behalf of the beneficiary. Beneficiaries are often children or family members, but they do not have to be. Trusts can even be set up to take care of pets. The language of the trust document stipulates when and how the assets placed into the trust will be distributed. These stipulations can be very specific, or they can give the trustee a great deal of discretion.
Trustees can be family members, trusted friends or professionals such as financial planners or attorneys. There are also companies that provide trustee services. The two most common types of trust are testamentary trusts and intro vivos trusts. Testamentary trusts are created when the trustee dies and are usually specified in the trustor's last will and testament. Intro vivos trusts are created while the trustee is still alive and are usually used to avoid probate.
Attorneys with estate planning experience may recommend using trusts when their clients have children who could inherit considerable sums at the age of 18 if they were to die prematurely. Trusts may allow assets to be distributed in a way that ensures children are provided for but prevents them from squandering resources that took a lifetime to accumulate.