Have you been thinking about adding a Trust to your Estate Plan? Smart move. Even if you’ve already started your planning, or if you already have a Will, Trusts can add a layer of protection for your family, loved ones and legacy once you’re gone. If you’ve got assets over $160,000, own a home or have dependents, setting up a Trust might just be the best thing you ever do, but where do you start?
For many people, the topic of Estate Planning seems daunting, overwhelming and confusing. Thinking about the inevitable isn’t something you want to do, but with our help, you can get through the process and feel confident in the choices you’ve made. Our in-depth look at all the types of Trusts available will help you get started.
13 Most Common Types of Trusts
Even though there are several different types of Trusts to choose from, you don’t have to be worried about picking the one that’s best for your needs and situation. Below, we’ve listed all the most common types of Trusts, explained in detail, so you know exactly what you need. First, you should understand the basic characteristics and parts of a Trust:
Grantor – The Trust creator (also known as Settlor or Trustor)
Trustee – Responsible for managing and administering the Trust (the Grantor appoints)
Beneficiary – Person, people or organization(s) who will one day benefit from the Trust (usually is yourself until you pass away)
Now we’ll look in detail at each of the major types of Trusts you can choose from. There are 13 we’ll cover today:
A Revocable Trust (also sometimes referred to as a Living Trust) is a Trust that can be changed or revoked for any reason, at any time, as long as the Grantor is still living and deemed mentally competent.
An Irrevocable Trust cannot be changed without all of the beneficiaries consenting first. At first glance, it may seem that Irrevocable Trusts are never a good idea, but in certain instances, they can actually be quite beneficial. Most people who set up Irrevocable Trusts do so for tax considerations. Additionally, as they can protect from lawsuits and creditors, Irrevocable Trusts can be wise for those who have a particularly litigious profession, like doctors or lawyers.
A Living Trust is really just another name for a Revocable Trust. It’s established, by you, during your lifetime, and will ultimately benefit your named beneficiaries after you pass away. While it will help your loved ones avoid the costly and often expensive process of probate, Living Trusts are not an effective option for asset protection while you’re alive. True, assets will be more difficult to access when they’re in a Living Trust, but they still could end up in the hands of creditors during your lifetime. It’s not foolproof by any means.
Sometimes, when two people want a Trust together, their best option is what’s known as a Joint Trust. This would be a good type of Trust for a married couple. During the couple’s lifetime, both have the ability to retain control over the assets, and upon one’s passing, the surviving partner then automatically becomes Trustee.
Also called a “Will Trust” or a “Trust Under Will,” a Testamentary Trust is created inside a Will and it will not take effect until your passing. Your Last Will and Testament explains how, at the right time, the actual Trust should be created. Testamentary Trusts aren’t considered Living Trusts because they’re not actually a viable document until you pass away (hence, they’re not “living”). Note that Testamentary Trusts will go through probate, and you’ll also lose some of the privacy protection that other Trusts can offer – these are losses of two of the major benefits of Trusts to begin with.
A Charitable Trust is exactly what it sounds like – a Trust set up to benefit a charitable organization. This is another one of the types of Irrevocable Trusts available, and can offer some tax benefits while still generating income. When you set up a Charitable Trust, you appoint an organization to be Trustee. As they invest (or liquidate and reinvest), a regular stream of income can be created.
Note there are two types of Charitable Trusts: Charitable Lead Trusts (CLTs) and Charitable Remainder Trusts (CRTs). The main difference between the two is simply in how the Trusts’ incomes are allocated. A CLT would give a set amount of income to a specified charitable organization first, and then the remaining amount would go to beneficiaries or stay in the Trust. A CRT, on the other hand, makes payments to beneficiaries first, with the remainder going to the charitable organization.
Special Needs Trusts are created for the benefit of a physical or mentally disabled person, under the age of 65, who will need life-long care. These Trusts are a way to provide financially without jeopardizing any eligibility for supplemental government aid (SSI or Medicaid). There are three main types of Special Needs Trusts, and which you choose will depend on your circumstances and type of need.
Asset Protection Trusts
Asset Protection Trusts are another way to protect your assets from creditors. Other than an Irrevocable Trust, this is the most iron-clad option if you’re concerned about judgements or any other threat against your estate. They can be costly to establish though.
An AB Trust is similar to a Joint Trust. It’s used to minimize estate taxes by married couples. The Trust is named AB because it splits into two Trusts upon the first member’s passing – the “A” Trust becomes the Survivor’s Trust and the “B” Trust is the decedent’s. It’s an effective tactic for minimizing a tax consequence because the first spouse’s death would not trigger any estate taxes – instead, his or her portion (up to the estate tax exemption in the year they die) would roll into an Irrevocable Bypass Trust. The remaining amount would transfer to the Survivor’s Trust (“A”) and not be taxed until his or her passing.
A Blind Trust is a Living Trust where beneficiaries have no prior information or knowledge about any of the assets within the Trust. Whomever you appoint as Trustee ultimately will have full discretion over all of the Trust assets and distribution. Blind Trusts would often be a good choice if you anticipate any conflicts of interest.
Another Irrevocable Trust, an Insurance Trust is established with only an insurance policy as the asset. It’s a way to avoid estate tax on any money that comes out of a policy upon your passing. People will use an Insurance Trust to ensure more of their estate will be passed onto beneficiaries.
Spendthrift Trusts are yet another Trust where the beneficiary will not have any sort of direct access to the assets or funds inside. The Trustee or Trustees you appoint have very broad powers to give beneficiaries the amount of Trust funds they see fit. Spendthrift Trusts are generally used when a beneficiary is either young, or when someone has been financially irresponsible in the past.
QTIP Trusts are “Qualified Terminable Interest Property Trusts.” They are used to ensure that income from the Trust would be paid to a survivor spouse, but the remaining funds would be held in the original Trust until the second spouse passes. At that point, whatever is left would be paid to beneficiaries.
Credit Shelter Trust
Generally an option for the very affluent, a Credit Shelter Trust can eliminate or greatly reduce estate taxes as assets are passed on to beneficiaries. A main benefit is the right it affords to surviving spouses once the first spouse passes away. Needs like those for educational or medical expenses can be covered by not only the income, but also the principle of the Trust. Additionally, assets left after the surviving spouse passes away can be transferred to the final beneficiaries without triggering estate taxes.
Many people are under the false pretense that Trusts are only for the very wealthy. This could not be further from the truth. Trusts can protect your legacy and your loved ones. Anyone who is an adult, owns property, has a dependent or who has more than $160,000 in assets should consider a Trust. Deciding what type of Trust you need is really the only thing left to do — and this guide should have helped you get started.