What are the different types of trusts?
If you thought that all trusts were created equal, you might want to think again. There is actually great variety in the world of personal trusts, and some are better suited for certain situations than others. If you are looking into setting up a trust, some types of accounts you might encounter include:
- Revocable Living Trusts
- Irrevocable Trusts
- Irrevocable Life Insurance Trusts
- Marital and Family Trusts
- Charitable Trusts (CRTs and CLTs)
- Testamentary Trusts
- Special Needs Trusts
Many people choose to establish a revocable trust to provide for themselves and their dependents in the event they become incapacitated. People also set up revocable trusts to avoid probate upon their death. Revocable Trusts allow the grantor to change or revoke the trust if they wish. You, as the grantor, can establish the trust and control it. You may even serve as trustee during your lifetime. If you become incapacitated, the trustee (or successor trustee) will ensure uninterrupted management of your financial affairs according to the terms you established when you set up the trust. And when you are gone, the trustee will distribute the trust assets, which will not be subject to the delays and expense, not to mention potential public review, of the probate process. A revocable living trust does not avoid estate taxes because you still own the property, but it can help reduce expenses.
An irrevocable trust is just what the name implies and cannot be revoked by the grantor once it has been created. Because it is irrevocable, this type of trust may provide tax benefits that a revocable trust cannot by reducing the estate's tax liability. It can also provide income to your children, grandchildren, or other heirs as you instruct both during your lifetime and after your death. You specify the beneficiaries of the trust, how it will function, and who will serve as trustee.
Irrevocable Life Insurance trusts
An irrevocable life insurance trust lets you reduce the size of your taxable estate with a trust which purchases a life insurance policy on your own life. The trust is the owner of the policy and pays the life insurance premiums from money you gift to the trust. The premium payments that you contribute to the trust may qualify for the annual gift tax exclusion amount if certain tax rules are properly followed. The trust is also the beneficiary of the policy and your heirs are the beneficiaries of the trust. When you die, the policy's death benefit is paid to the trust, and the trust can be distributed to the named beneficiaries in the manner you choose.
Marital and Family Trusts
Although your estate can generally pass to your spouse estate tax-free upon your death, you may choose to establish a family (or exclusion) trust to take advantage of the applicable exclusion amount at the first death of a spouse. This type of trust can provide a lifetime of income to the surviving spouse, with the remaining assets of the trust passing to your heirs estate tax-free upon the surviving spouse’s death.
Through a charitable trust, you may maximize the impact of your giving. With a charitable remainder trust (CRT), you reap the benefits of reducing your taxable estate while retaining an income stream for yourself, your spouse, or family. When the trust ends after a specified time or when the last beneficiary has died, the remainder of the trust passes to the qualified charity or charities you designated. Meanwhile, you get the benefit of a tax deduction when the trust is created.
A charitable lead trust (CLT) is similar to a CRT, but in reverse. In this arrangement the charity receives the income stream for a period of years, and at the end of that time, the remainder reverts back to your heirs.
Special Needs Trusts
Caring for those with special needs can be an expensive and lifelong proposition. Parents and family members may wonder whether they have the financial resources for a child with special needs or addiction issues, and especially worry about what will happen after they die. A Special Needs Trust is a fund established by parents or other family members to provide for the well-being of their disabled family member while preserving any federal or state benefits the individual may be eligible for.
Testamentary trusts are created in a will, and the terms of the trust go into effect when the grantor passes away. If you have a spouse or children who will require income and care after you are gone, a testamentary trust will allow you to provide without giving them an overwhelming lump sum at your death. You can decide at what age, or under what circumstances the beneficiaries will receive the funds. Note that because a testamentary trust is part of a will, the assets must go through probate.
The tip of the iceberg
These are just a few of the most common types of trusts. There are a great many options available to you. Don't try to go it alone, though. The laws on trusts are complex, and you will benefit from the assistance of an experienced estate planning attorney to advise you and to set up the trust.
The content of this page is for informational purposes only and is not intended to offer any tax, legal or financial advice. Please consult with your personal professional advisors to discuss your situation.cn510963232005