Trusts are one of the most versatile estate planning tools available, offering significant benefits in terms of asset management, tax planning, and legacy preservation. However, despite their advantages, trusts are not a one-size-fits-all solution. Many individuals assume that creating a trust automatically protects assets from creditors, long-term care costs, and taxes, but this is not necessarily the case.

In this article, we will explore what trusts can and cannot do, examine their role in estate and tax planning, and help you determine whether a trust is the right tool for your particular situation.

What is a Trust?

A trust is a legal arrangement in which one party (the grantor) transfers assets to another party (the trustee) to hold and manage for the benefit of designated beneficiaries. Trusts can be structured in many ways to achieve specific goals, ranging from probate avoidance to charitable giving and asset protection.

There are two primary categories of trusts:

• Revocable Trusts (Living Trusts): Can be changed or revoked by the grantor at any time while they are alive.
• Irrevocable Trusts: Once created, they generally cannot be altered or revoked without the consent of the beneficiaries and sometimes the court.

Revocable Trusts are the most common type of trust by a large margin, but each type of trust serves different purposes, and understanding their limitations is crucial in deciding whether a trust is appropriate for your estate plan.

Trusts are an excellent way to manage assets for minor children, beneficiaries with special needs, or individuals who may not be financially responsible. A trustee can oversee the funds and distribute them according to specific conditions, ensuring that the assets are used wisely. The trustee can even make distributions directly for the benefit of a beneficiary rather than to the beneficiary.

A Special Needs Trust (SNT) is a specific type of trust designed to provide for a disabled beneficiary without jeopardizing their eligibility for government benefits, such as Supplemental Security Income (SSI) or Medicaid.

Moreover, a trust can allow for staggered distributions over time, preventing an heir from spending their entire inheritance too quickly. For example, a trust can be structured so that a child receives portions of their inheritance at ages 25, 35, and 45 instead of all at once.

A trust can also allow farming operations to continue to operate while providing for non-farming children. The trust can hold onto the land and allow it to be rented by the children who are farming. The rent could be modified or reduced to account for the farming children’s interest in the trust, while also providing income to the non-farming children in the form of rent. Further, the trust could have terms that allow the farming children to purchase the farm on a contract for deed or at a reduced price to allow it to stay in the family without requiring the farming children to be able to produce a full purchase price shortly after the death of the grantor(s).

A real-world example: Consider a parent who wants to leave an inheritance for their child, but the child is only 20. The trustee can make distributions to help pay for education and housing for the child, but the bulk of the trust stays in the trust. The parent sets up a staggered distribution of 25, 30, and 35, as s/he feels that at that time the child will be more mature and able to responsibly use the funds. 

A revocable living trust can serve as a mechanism for managing assets in case of incapacity. If the grantor becomes unable to handle financial affairs, a successor trustee can step in without the need for court intervention, ensuring continuity in financial management.

This is especially useful for individuals who own businesses or have complex financial portfolios, as it ensures that their financial affairs are handled seamlessly. The successor trustee can manage investments, pay bills, and ensure that financial obligations are met without delay. The trustee can continue to work with the grantor’s accountants, financial advisors, etc., or if needed, hire such professionals.



Additionally, incapacity planning with a trust allows family members to avoid the time-consuming and expensive process of obtaining guardianship or conservatorship in court, which can cause additional strife in the family.

Although revocable trusts do not provide direct estate or gift tax protection, they can be set up in a way to limit estate or gift tax by allowing assets to bypass a spouse. Irrevocable trusts can be structured to reduce estate tax liability. For example:

• Irrevocable Life Insurance Trusts (ILITs) can remove life insurance proceeds from an estate.
• Grantor Retained Annuity Trusts (GRATs) and Charitable Remainder Trusts (CRTs) can help reduce estate and gift taxes through structured giving.
• Qualified Personal Residence Trusts (QPRTs) allow homeowners to transfer property at a reduced tax value while continuing to reside in their homes for a set period.
• Spousal Lifetime Access Trusts (SLATs) allow one spouse to provide financial support for the other while removing assets from their taxable estate.
• Revocable Trusts for Married Couples can help reduce estate taxes by ensuring that a portion of the couple’s assets remain in the trust after the first spouse’s death. When structured properly, this can take advantage of the estate tax exemption for each spouse.

A bypass trust, also known as a credit shelter trust, is designed to utilize the estate tax exemption of the first spouse to pass away. When one spouse dies, instead of all assets transferring directly to the surviving spouse, a portion of the assets (up to the estate tax exemption limit) is placed into the bypass trust. These assets are held for the benefit of the surviving spouse, but they are not considered part of their taxable estate when they pass away.



For example, suppose a couple has $6 million in assets and the estate tax exemption is $3 million per spouse. When the first spouse dies, $3 million is placed into the bypass trust, allowing the surviving spouse to access income and potentially some principal for specific needs. Upon their passing, this $3 million is not included in their taxable estate, potentially saving substantial estate taxes for heirs. This provides a large benefit to the Estate by protecting $3 million from being taxed.

Blended families can present unique estate planning challenges. A trust can ensure that children from previous marriages receive their intended inheritance while also providing for a surviving spouse.

For example, a Qualified Terminable Interest Property (QTIP) Trust allows a surviving spouse to receive income from the trust during their lifetime while preserving the principal for children from a previous marriage. This ensures that assets ultimately pass to the intended heirs while still allowing the surviving spouse financial security.



A trust can also prevent conflicts between stepchildren and a surviving spouse by clearly outlining asset distributions and responsibilities.

A trust protector is an independent third party appointed to oversee and ensure the trust operates as intended. Trust protectors do not manage the trust daily but have specific powers, such as:

• Removing or replacing a trustee if they are not fulfilling their duties.
• Resolving disputes between beneficiaries and trustees.
• Modifying trust provisions in response to changes in laws or family circumstances.
• Ensuring the grantor’s original intent is honored even if circumstances change over time.

Trust protectors are especially useful in long-term trusts where laws and family situations may evolve over decades. Having this oversight helps ensure that the trust remains effective and beneficial for future generations. 



Trusts are a valuable estate planning tool, but they are not the right fit for everyone. Before setting up a trust, it is crucial to work with an experienced estate planning attorney to evaluate your specific needs and determine the best strategy for your situation.

To learn more about whether a trust is right for you, contact one of our experienced estate planning attorneys at Birkholz & Associates, LLC today. Our team can help assess your situation and develop a personalized estate plan that meets your needs and protects your legacy.