Understanding different types of trusts

New Yorkers who get remarried for the second, third or subsequent time should make estate planning a priority.

Estate planning can seem like a very daunting task to many people in New York yet it is an extremely important thing for people to do. One of the reasons that some people choose to avoid it is that they find it difficult to know what tools or documents they really need. Do I need a will? Is a trust better for me? What type of trust should I create? These are just some of the questions that people can struggle with.

Trusts have become popular as they are often believed to help people reduce some costs and preserve more of their assets. This may be the case in some situations but all trusts are not the same. Understanding the different types of trust available is an important first step in the estate planning process.

What is a special needs trust?

U.S. News and World Report explains that a special needs trust gives families the opportunities to provide financially for a child or other relative who may be disabled in some way. These trusts might help parents take care of a child with Down's syndrome or provide assistance for a person who has suffered a debilitating accident.

Special needs trusts must be created carefully so as not to prevent beneficiaries from receiving other forms of support they may qualify for. Examples include Medicaid or Supplemental Security Income.

Are there trusts to help pay for my child's college education?

According to 360 Degrees of Financial Literacy, there are two types of trusts that may be used to help pay for a child's college education. However, New Yorkers may find it beneficial to investigate other options like custodial accounts as well. Of the two trusts for college purposes, one is known as a Section 2503(c) trust and provides distribution of funds to the student upon reaching the age of 21. A Crummey trust does not do this and can also be used to fund the education of more than one beneficiary.

What is a living trust?

There is more than one type of living trust. CNN Money indicates that an irrevocable trust provides no control over assets once created but does offer strong tax advantages upon death. There are many subtypes of these trusts including Medicaid Asset Protection Trusts which can use the irrevocable trust framework to shield assets from the reach of Medicaid and in which rights can be reserved for some control of the property during the lifetime of the creator of the trust. Revocable trusts give people the ability to make changes throughout their lives but do not shield those assets inside the trust from Medicaid claims. There are a substitute for a will and help the parties avoid probate.

What are some other types of trusts?

Some lesser-known trusts include a generation-skipping trust. This trust allows money to be saved for grandchildren or their heirs free of tax. A credit shelter trust, or a family trust, is a unique way of bypassing estate taxes by putting some money into the trust and then gifting the remainder of an estate to a spouse.

How can I determine which trust is right for me?

The best thing for a person to do when interested in estate planning is to talk to an attorney. Learning about the different types of tools from someone with experience can guide New York residents to make appropriate decisions for their assets and their heirs.