What are the Different Types of Trusts?
Much like a last will and testament, the common interpretation of a trust has been twisted and shaped by popular media. Yes, it’s a legal device used by people to pass down possessions to their descendants. However, the average person can and should also investigate the different types of trusts so they can protect their estate and take care of their children. This article provides a clear understanding of trusts so you can decide what’s right for you.
What is a Trust?
In simple terms, a trust holds assets for someone’s benefit as a legal entity. A proper trust arranges everything you own in such a way that you ensure the right people and/or organizations receive what you intend after your passing. It creates a clear relationship between three people:
- Trustor – the person with the estate
- Trustee – the person in charge of the estate if/when the trustor is incapacitated or deceased
- Beneficiary – the person or persons who receive assets from the trustor
We encourage you to speak with legal and financial professionals as the first step of creating such a document.
The Two Primary Types of Trusts
A wide variety of trusts exists, and many of them depend on the state where you live, the size of your estate, and what you want to happen to your estate. However, most of them can be lumped into one of two designations:
Discerning the difference and deciding which is best for your estate is the second step in the process.
As you’d imagine from the name, the trustor can revoke or change the terms of a revocable trust as they choose. Also known as a “living trust,” it gives all the power to the estate holder while they are alive. Such trusts can be adapted as needed, as the trustor and trustee are usually the same people.
A revocable trust provides maximum personal control over assets, as the trustor knows exactly what happens and where the revenue from the trust goes. However, those funds must be reported as income, which means some people opt for protection against taxation. Furthermore, the terms of a revocable trust immediately become irrevocable upon the death of the trustor. Thus, many trustors choose an irrevocable trust and select an independent trustee.
The terms of an irrevocable trust cannot be changed once they are set in place, limiting the ability for adjustment if circumstances change. However, this income cannot be taxed, giving the trustor and beneficiaries greater security over their assets. That’s why these trusts are popular with people desiring greater long-term financial protection.
Other Common Types of Trusts
All of the following trusts fall into one of the two categories listed above, but each of them has situational nuances that require specific explanation. As always, you should speak with your lawyer and accountant when deciding if any of them are right for you and your estate.
The simplest of all trusts, a testamentary trust encompasses what most people think of a trust — it’s the part of a last will and testament that people only read after someone has died. These trusts are often irrevocable since the will had to be notarized and viewed by witnesses to make it official. They usually go through the probate process to ensure everything in order before the trustee can transfer assets to the beneficiaries.
Special Needs Trust
Estates use these trusts to provide for descendants who are incapacitated and in need of specialized attention. The trustees monitor the funds to ensure the long-term protection of the beneficiary.
In this instance, a charitable trust provides for a large contribution to the organization(s) outlined by the trustor in their will. The difference between a trust and a generic charitable contribution comes down to an issue of taxation and the distribution of funds. As there can be terms and conditions for how the funds are used, the trustee monitors the beneficiaries to ensure the trust isn’t violated.
Another form of the irrevocable trust, this version has a rather obvious name. A spendthrift trust provides funds for the named beneficiaries and ensures they don’t spend the money irresponsibly. These trusts have very specific terms, and the trustees monitor the beneficiaries closely.
Married couples frequently use this format, also known as an “AB” or “joint” trust. Created together, typically in revocable fashion, these trusts have “A” and “B” outcomes depending upon several factors such as:
- Who dies first
- What assets go to which kids
- When the kids get the assets
- What happens when both spouses die
- How much of the estate goes to the surviving spouse and how much goes to the kids
- When the trust becomes irrevocable
Bypass trusts require special attention, but they are very popular for families.
The abbreviation for “qualified terminable interest property,” a QTIP trust provides for the distribution of assets at various times and conditions. People use these trusts to share property and income among descendants on a staggered schedule. It gives the surviving spouse an income from the property while not placing that person in control of the assets.
A blind trust is administered without any input, oversight, or knowledge from the beneficiary. The trustee controls everything, and the beneficiaries receive the prescribed income from the trust while being “blind” to the details. Trustors use such arrangements because of conflicts among the beneficiaries.
A lesser-used format, a Totten trust is often called “payable-on-death” and is usually revocable. Simply put, you place money inside a bank account or similar security, and the beneficiary receives access to it only when you die. Moreover, they don’t have access to it before your passing, and they often aren’t even aware of its existence.
Asset Protection Trust
As you might imagine, this form of irrevocable trust guards your property, income, and other assets from outside influence. These include:
- Divorced spouses
- Legal disputes
However, because of the security involved, this is the most expensive type of trust.
Life Insurance Trust
As with many irrevocable trusts, this one protects your life insurance payouts from being taxed. That way. you can pass on the maximum possible amount to your beneficiaries.
Credit Shelter Trust
A common trust for couples wanting to avoid taxes on inherited assets, it permits asset transfer from one spouse to the other. The surviving spouse doesn’t control the assets — the trustee does — but they do gain access to income without paying as much in taxes.
The name says it all: the assets skip the children and go directly to the grandchildren. Thus, the family avoids paying estate and inheritance taxes while allowing the children to benefit from the income earned off the assets.
Protect Your Estate with the Right Trust for Your Situation
Just like with many estate planning scenarios, one size does not fit all when it comes to choosing the best trust for you. That decisions comes after consulting your attorney, financial planner, and other such experts. You want to ensure the long-term protection of your family and your assets after you die. That requires substantial expertise with the options and knowledge of your circumstances.
Once you have your estate placed into the trust that best meets your needs, you can store that information for your trustees and beneficiaries in your account with The Postage. You can even create scheduled and detailed messages to be sent upon the event of your passing to explain your trust. We can help you prepare your documents, files, information, and all manner of end-of-life planning.