Trusts are a common financial tool used in estate planning. Trusts are defined as legal entities created by a trustor through which a second party, the trustee, holds the right to manage the trustor’s assets for the benefit of a third party or beneficiary.
There are many types of trusts that work in slightly different ways to secure the assets for the beneficiaries. Trusts also allow the passage of these assets to occur quickly by avoiding probate, additional court fees, and they may even reduce the tax burden on the assets as well. An overview of some of the most common types of trusts and their basic structure is provided below.
Living trusts are created by the trustor in their lifetime and allow them to continue using the assets and property placed in the trust while they are alive. The assets and property are conveyed to the beneficiary through a trustee upon the trustor’s death. This is the most common type of trust and allows individuals to pass on inheritances while avoiding probate court.
Revocable trusts are very similar to living trusts in that they are created during the trustor’s lifetime, and they can be changed or altered by the trustor while they are still alive. These trusts move assets out of probate but allow the trustor to retain control of the assets.
Unlike revocable trusts, irrevocable trusts don’t simply move assets out of probate, they move them out of the trustor’s estate, and these trusts cannot be altered once they have been executed, no matter whether the trustor is alive or not. The trustor loses all control over the assets and cannot thereafter change the terms or dissolve the trust. Irrevocable trusts are generally established to minimize or eliminate estate taxes or to reduce the tax liability on the income generated by the assets in the trust. In some instances, assets in an irrevocable trust may be sheltered against legal judgments against the trustor.
Will or testamentary trusts are described in a trustor’s will and created upon their death. A will trust is instituted by an executor, who manages the trust for the trustor’s beneficiaries after their will has been created. The assets are subject to probate and transfer taxes, and this type of trust is irrevocable.
Insurance trusts allow the trustor to include the value of their life insurance policies within the scope of the trust, thus avoiding estate taxes on the funds. These are irrevocable trusts that the trustor cannot change. In many instances, these policies can help pay for the expenses incurred by the estate after the death of the trustor.
Charitable trusts name a non-profit organization or charity as the beneficiary. A charitable lead trust can be included as a component in another trust, allowing the trustor to assign some assets to family or inheritors and some to the charity. Charitable remainder trusts enable the trustor to receive the income generated by the trust’s assets for a defined period of time, with the remainder of the assets then going to the charity.
Blind trusts refer to trusts that are entirely handled by the trustees, and no knowledge of the trustees’ activities is conveyed to the beneficiaries. These types of trusts are desirable when there may be conflict between the beneficiaries and the trustees or amongst the beneficiaries.
Credit Shelter Trusts
Credit shelter trusts allow the trustor to grant beneficiaries an amount of assets up to the estate tax exemption limit, with the rest of the assets going to a spouse or family member. These trusts remain tax-free forever, no matter how much the assets may grow over time.
Generation-skipping trusts employ generation-skipping tax exemption allowances to allow assets to be distributed to grandchildren or subsequent generations without incurring additional estate taxes upon the death of the trustor’s children.
Qualified Terminable Interest Property Trust
These trusts are frequently used to provide income for a surviving spouse. They allow the trustee to define asset distribution to different beneficiaries at different times – generally to a spouse after the trustor’s death, and then to children after the spouse’s death.
Asset Protection Trusts
Asset protection trusts are generally executed outside of the US in order to protect the trustor’s assets from creditor claims. They are generally irrevocable for a defined time period, and control of the assets is returned to the trustor upon the termination of the trust.
Trusts can be employed to meet many different financial and asset goals. If you are considering executing a trust, it’s always a good idea to meet with an experienced estate planning professional who can help identify the best type of trust to meet your unique financial needs and goals.