What Are The Most Common Types of Trusts Used In Virginia?
The most common types of trust that we do at our firm in Virginia are revocable living trusts being created principally for probate avoidance purposes; to avoid any court involvement and the oversight of any of the requirements of the trustee under the trust. However, these are not the only types of trusts we prepare for clients. Other types of trusts include testamentary trusts that are created under the will of a person for the benefit of certain types of heirs. This is typically for heirs who are under the age the testator or creator of the will wanted the heir to attain before they gain control over the assets comprising that arrangement. The major purpose of that, particularly with parents of minor children, is to permit them to create their own rules for when they believe their children will reach the level of maturity they consider to be appropriate for them to be able to receive and control those assets they want them to receive.
There are also irrevocable trusts that are created during the lifetime of a person that are done for certain creditor protection reasons. These could be trusts designed to own and be the beneficiaries of life insurance policies in order to provide liquidity to pay any taxes that may be assumed to be owed when the person dies. There can also be certain asset protection trusts that are created to insulate assets that are owned by the trust from any creditors. These are relatively rare in our office but tend to be done by certain types of professions such as doctors concerned with malpractice lawsuits ensuring that there is a certain amount of money that can be insulated beyond what their malpractice insurance covers. Those are some of the types of trusts and the reasons to set them up.
Will A Trust Protect My Assets From Creditors?
A trust can protect your assets from creditors depending on the type of trust that you have. If it’s a trust that you reserve the right to change, amend, revoke, and terminate, then no. That type of trust will not protect any of the assets of the creator from any of their creditors. On the other hand, if it’s a trust that you are setting up for someone else, such as a child, then that type of trust can protect the assets. As long as it doesn’t allow the beneficiary of the trust to be able to terminate and amend the trust then it will protect the assets in the trust from the claims of the beneficiary’s creditors.
What’s key here, in terms of permitting asset protection, is that the trust involved is irrevocable. That’s a very key ingredient in determining whether or not the assets of the trust can be removed from the claims of creditors. There’s more involved than that and it depends on whether or not the beneficiary can also be a trustee. There are other types of trusts that would be permissible and yield stronger asset protection than irrevocable trusts. In general, the revocability element, who the beneficiary is, and who can revoke the trust will dictate whether the trust is going to protect the assets from the claims of creditors or not.
Are There Specific Trusts That Help In Planning For Children With Financial Issues?
When deciding on a trust while planning for children with financial issues there are several individually unique elements of different trusts to look at. For example, with minor children it depends upon the amount of money that is expected to benefit them and what age the creator would want the minor child to attain before they can gain control of the assets. It’s important to know what the thresholds of asset value are in a given state. Under Virginia law trusts can be terminated by a beneficiary once the assets reach a level of $100,000 or less. While a $100,000 is still a lot of money; in the terms of a trust it’s not that much. It’s important to recognize what amounts of money really are going to comprise a trust that’s being created because that’s going to dictate what type of trust to use.
For minor children where we’re only looking at a couple hundred thousand dollars and the purpose of the money is more to provide for a college education than anything else then we’re using custodial accounts under the Virginia Uniform Transfers to Minors Act. We use this act to provide that type of benefit and that amount to a child in these circumstance because it’s going to be the easiest to administer, less expensive, and the most efficient.
However, if we’re dealing with 4 or 5 hundred thousand dollars and above then we use a more modern approach to distribution planning regardless of the circumstances of the child, whether they’re good with money, or whether they have a substance abuse issues. In this example the parents are providing lifetime trusts for their children rather than trusts that are going to terminate at a certain age. The reason they’re doing this is that they want to ensure that the assets are protected from the claims of creditors; particularly divorcing spouses of children and that the assets remain in a family line. Under those circumstances, if an age becomes involved it is at what age a child becomes their own trustee. This then crosses into the circumstances of the child. If we’re dealing with a child that’s maturing at the right rate where the parents feel comfortable that they can handle their own money then they would create a trust where the child is their own trustee when the trust is created, at the parent’s death, or they would provide the age the child would need to attain.
However, if we’re dealing with children where the parents have determined that they are spendthrifts, aren’t good with money, or have substance abuse problems then under those circumstances the parent may appoint other individuals or institutions to be the trustee. Whatever they choose becomes part of the planning process at that point.
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