Like many people, you likely have some idea what a trust is, but you may also feel uncertain about how a trust works much less which type might best suit your estate planning needs. At its most basic, a trust is a legal arrangement that allows one party to hold and manage assets that are intended to benefit a third party (or multiple third parties). When properly established, a trust can offer significant financial, tax, and administrative advantages. Choosing the right type of trust, however, is essential to ensure your plan reflects your goals, protects your loved ones, and supports your long-term wishes. With that in mind, the attorneys at Legacy Care Law Firm explain several common types of trusts and discuss the distinct benefits each can provide within your New Hampshire estate plan.
Understanding the Role of Trusts in Estate Planning
A trust can serve a variety of purposes beyond simply transferring assets. It can help avoid probate, minimize taxes, protect property from creditors, manage assets during incapacity, and control how wealth is distributed after death. Some trusts are created during your lifetime and take effect immediately, while others are established through your Last Will and Testament and only become effective at your passing. Trusts can also be revocable, meaning you retain the ability to modify or terminate them, or irrevocable, meaning they cannot easily be changed once created. With so many variations, consulting an experienced New Hampshire estate planning attorney is crucial to ensure that the right type of trust is used and that it is properly drafted to achieve your intended outcomes. Commonly used estate planning trusts include:
- Testamentary Trust. A testamentary trust is created through provisions in your Will and only takes effect after your death. It allows you to control how and when your beneficiaries receive their inheritance. Parents of minor children often use testamentary trusts to ensure that assets are managed responsibly until their children reach adulthood. While you are alive, you can amend or revoke your Will, meaning the testamentary trust remains revocable until your passing.
- Living Trust. A living trust, also known as an inter vivos trust, is established during your lifetime. It becomes effective immediately and can be either revocable or irrevocable. Living trusts are among the most popular estate planning tools in New Hampshire because they can help avoid probate, ensure privacy, and provide a mechanism for managing assets if you become incapacitated. Assets placed in the trust are administered by a Trustee according to the terms you set forth, both during your life and after your death.
- Revocable Trust. A revocable living trust offers maximum flexibility. You may add or remove assets, change beneficiaries, or revoke the trust entirely at any time while you are alive and competent. This type of trust is ideal for individuals who want control and flexibility during their lifetime but also wish to streamline asset transfers at death. Upon your death, the trust typically becomes irrevocable, locking in the terms for your beneficiaries.
- Irrevocable Trust. Unlike a revocable trust, an irrevocable trust cannot be easily altered or terminated once executed. Because the assets are no longer legally owned by you, they are often shielded from creditors and excluded from your taxable estate. While you relinquish control, you gain valuable advantages, such as asset protection and potential estate tax reduction. This type of trust is frequently used for advanced planning strategies, such as protecting family wealth or qualifying for Medicaid.
- Asset Protection Trust. An asset protection trust is designed to safeguard wealth from potential future creditors or lawsuits. Typically irrevocable, these trusts are used by individuals in high-risk professions or those seeking to preserve family assets. While some states authorize domestic asset protection trusts, New Hampshire residents often look to carefully structured irrevocable trusts that comply with federal and state law to achieve similar protection. The key is that the Settlor generally cannot be a beneficiary if the trust is to provide true creditor protection.
- Constructive Trust. A constructive trust is not intentionally created through a trust document. Instead, it is imposed by a court to prevent unjust enrichment. Courts in New Hampshire may establish a constructive trust when one party wrongfully holds property that should belong to another. These situations often arise in cases involving fraud, undue influence, or breach of fiduciary duty. A constructive trust acts as a legal remedy to ensure fairness and justice.
- Spendthrift Trust. A spendthrift trust is designed to protect beneficiaries who may not be financially responsible or who are vulnerable to creditor claims. This trust restricts the beneficiary’s ability to transfer or pledge their interest in the trust before distributions are made. Because the Trustee controls when and how funds are distributed, creditors cannot directly access trust assets, offering a safeguard for beneficiaries who might otherwise misuse or lose their inheritance.
- Generation Skipping Trust. A generation-skipping trust allows assets to pass directly to grandchildren or even great-grandchildren, bypassing your children’s generation. This strategy can significantly reduce estate taxes by minimizing the number of taxable transfers. These trusts are often used by high-net-worth individuals who want to preserve family wealth over multiple generations and protect assets from future estate taxes or marital claims.
- Qualified Personal Residence Trust (QPRT). A QPRT is an advanced estate planning tool used to transfer a personal residence or vacation home to heirs at a reduced gift tax value. The Settlor retains the right to live in the home for a specific number of years, after which ownership transfers to designated beneficiaries. This strategy can be particularly beneficial in areas of New Hampshire where real estate values are appreciating quickly, as it removes future appreciation from your taxable estate.
- Special Needs Trust. A special needs trust allows you to provide financial assistance to a loved one with a disability without jeopardizing their eligibility for government benefits such as Medicaid or Supplemental Security Income. The trust holds and manages assets for the benefit of the disabled individual, paying for supplemental needs like education, therapy, or recreation. This ensures that the beneficiary enjoys an enhanced quality of life while remaining eligible for vital public assistance.
- Irrevocable Life Insurance Trust (ILIT). An ILIT is an irrevocable trust designed to own life insurance policies. By transferring ownership of the policy to the trust, the death benefit is excluded from your taxable estate. When you pass away, the proceeds are paid to the trust, which can then use the funds to pay estate taxes, provide liquidity for your estate, or distribute income to beneficiaries. For families with significant wealth or business interests, an ILIT can be an effective way to preserve assets and maintain financial stability for heirs.
- Charitable Trust. Charitable trusts blend philanthropy with tax planning. By creating a charitable trust, you can support causes you care about while obtaining potential income, gift, and estate tax benefits. Two of the most common types are charitable remainder trusts (CRTs) and charitable lead trusts (CLTs). In a CRT, income is paid to you or another non-charitable beneficiary for a period of time, after which the remaining assets go to a charity. In a CLT, the charity receives income for a period, and the remainder eventually passes to family members.
- Totten Trust. A Totten trust, sometimes called a “payable on death” account, is created when you name a beneficiary on a financial account. During your lifetime, you retain full control over the funds. Upon your death, ownership automatically transfers to the named beneficiary without going through probate. This simple arrangement provides an easy way to pass assets directly to loved ones while maintaining control during your lifetime.
- Grantor Retained Annuity Trust (GRAT). A GRAT allows you to transfer appreciating assets out of your estate while retaining an income stream for a defined term. During that term, you receive annual payments, and at its conclusion, any remaining assets pass to your beneficiaries with little or no gift tax liability. GRATs are frequently used to transfer assets expected to grow significantly in value, such as stocks or closely held business interests.
- Qualified Terminable Interest Property (QTIP) Trust. A QTIP trust is often used in blended families. It provides income for a surviving spouse for life while preserving the remaining assets for children from a prior marriage or other chosen beneficiaries. This type of trust ensures that your current spouse is supported while also guaranteeing that your ultimate estate passes according to your wishes. QTIP trusts can also help maximize the use of federal and state estate tax exemptions.
Can We Help You Analyze Trusts for Your New Hampshire Estate Plan?
For more information, please join us for an upcoming FREE seminar. If you would like to discuss trusts and how they might fit into your New Hampshire estate plan, contact our estate planning attorneys in our North Andover, Woburn, and Beverly offices at (978) 969-0331. Our Salem and Nashua, New Hampshire office can be reached at (603) 894-4141.
Attorney Daniel A. DeBruyckere has been practicing law in New Hampshire and Massachusetts since 1998, and has helped hundreds of clients with their estate planning and elder care issues. He is very well respected in the area of estate planning, probate, trust administration, elder law issues, and business planning Read More!
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