Types of Trusts: A Brief Overview of a Complicated Process
Many different types of trusts are available to estate owners. When you have a large estate and you don’t want to assign it to someone all at once, you can create a trust. The benefits of a trust are many, specifically that the assets in the trust are often still available to you as well as the interest accrued. With a trust, you can also decide when beneficiaries will begin receiving from the trust.
Trusts require more lawyer time, but results will be worth it. You want to be sure that the best trust for your situation is chosen.
Basics of Trusts
Trusts can be started before or after a person’s death. A will can even form a trust. Once assets are placed into a trust, they become a part of the trust, belonging to the trust and becoming subject to the trust rules and instructions.
A trust is a property right. While the trustee holds the trust property title, the beneficiary receives trust benefits. This is the basic structure of every trust although there are many variations.
Know Your Trust Terminology
Beneficiary – the person or people who is chosen to benefit from a trust. In the case of multiple beneficiaries, not every individual must have the same interest in the trust.
Decedent – A term for someone who has died. In the subject of trusts, it’s usually the grantor.
Grantor – Also called a “settler” or “trustor”. This person creates the trust and has the legal power to transfer property that is within the trust.
Trustee – this individual or corporation holds the title of the property in the trust for the beneficiary and is responsible for managing the assets as set out by the trust.
Property – these are assets placed within the trust, which are sometimes called “principal” or “corpus.” Depending on the trust, property can be transferred into the trust during the lifetime of the grantor or according to the grantor’s will after death. Property includes money, real estate, jewelry, and much more.
Types of Trusts
Although trusts all have the same basic structure, many different requirements and variables can complicate the process. Since trusts can be so complex, you need to be sure that you choose the right type of trust according to your goals. An estate planning lawyer is the perfect resource for ensuring that your ideas are legally sound for a trust.
The benefit of a revocable trust is that the trust can be changed during the lifetime of the grantor. A revocable trust is also called a living trust, where the grantor has the power to add or remove property throughout his lifetime while also being beneficiary as well. Property within a revocable trust avoids probate if the grantor dies suddenly.
However, if a grantor has creditors, these creditors can still gain access to the assets within the trust after petitioning a court. After a grantor’s death, the revocable trust often becomes an irrevocable trust.
This type of trust cannot be changed in any way after it’s been created. For example, if the grantor transfers something into the irrevocable trust, no one can remove it from the trust. An irrevocable trust can also hold a survivorship life insurance; however, this can cause negative consequences. Be sure to consult a lawyer about this option.
Asset Protection Trust
This trust can be useful for an individual who fears that creditors may try to lay claims on his or her assets. Asset protection trusts are often created in countries outside of the United States, but the assets don’t always need to be transferred to the foreign country. These trusts make the assets irrevocable until a certain number of years have passed. When the trust ends, the assets revert back to the control of the grantor (or trust maker).
Just as you would expect, a blind trust means that the grantor or person who handles the trust can handle the assets in the trust without the knowledge of the beneficiaries. This can be wise when a beneficiary might have a conflict of interest if they are aware of the trust’s assets. A blind trust protects the assets and the beneficiary too.
Buildup Equity Retirement Trust
This trust is set up for a living spouse. The grantor creates the trust to benefit his or her spouse, gifting more assets to the trust using an annual gift exemption. The assets become exempt from both estate and gift taxes. For this trust, the grantor does not want to use an unlimited marital deduction.
A grantor creates a charitable trust to benefit favorite charities. Usually these charitable trusts are also a part of an estate plan to help lower estate and gift taxes. Moreover, naming a charity as a beneficiary while you’re still living can result in a number of benefits for you as well.
Charitable Remainder Annuity Trust (CRAT)
This trust often handles a large group of assets that pays back a fixed amount each year. The grantor or trust maker selects a designated charity to receive all remaining assets. When the donor dies, the remaining assets transfer to the named charity.
Charitable Remainder Unitrust (CRUT)
The Internal Revenue Service allows an irrevocable trust to be set up with assets with a certain percentage going to a beneficiary. Once a specific term of time has ended, the remainder of assets transfer to the designated charity.
Charitable Lead Annuity Trust (CLAT)
This trust is irrevocable with an income interest going to a charity while other passing assets go to beneficiaries. Different from the other trusts because the charity receives the interest while the other beneficiaries receive the remainder after a set term.
Charitable Lead Unitrust (CLUT)
This type of trust allows a certain amount of the assets to be annually given to a charity. Money is given in this way for only a fixed term. At the end of the term, all remaining assets return to the donor or to another designated individual.
In some cases, the court might decide that an implied trust was in place despite no one ever legally put together a trust. The court analyzes the intentions of the property owner with his or her assets. In these cases, a court can say that an implied trust was basically in place.
Credit Shelter Trust
A married person works to become exempt from estate taxes by transferring assets to beneficiaries. In most situations, the beneficiaries are that person’s children. The credit shelter trust helps married couples to avoid heavy estate taxes.
Built on criteria created by the trust, the trust is managed by the trustees. While a discretionary trust does not fix the beneficiaries and the assets, it must be handled by the trustees who follow the standards of that trust. The trustees decide which beneficiaries and assets are used.
Generation Skipping Trust
This trust names the grandchildren of the grantor as the beneficiaries of the trust. Skipping a generation can help avoid estate taxes since the deceased’s children aren’t inheriting. This can be a useful trust for specific situations.
A person can use a grantor trust to transfer property and avoid taxes. These gifts then are given to a person or a business entity. And the giver can avoid dealing with taxes, probate, and other annoyances.
Grantor Retained Annuity Trust (GRAT)
Set up as an annuity, this trust allows the donor to donate an asset to the trust and receive an annual payment during a set amount of time. This trust allows a person to give a large gift and not face the gift tax. Once the set term ends, the assets from the trust go to the beneficiary as a gift.
Grantor Retained Unitrust (GRUT)
An irrevocable trust like this permits a grantor to place assets into the trust while receiving an annual income within a set time. This trust allows the time to either be fixed or set for the lifespan of the grantor.
Grantor Retained Income Trust (GRIT)
While this trust is set up for a beneficiary, the grantor can choose to receive income from the assets for a period of time. After that period of time has ended, the beneficiary will then receive the income from the assets.
Intentionally Defective Grantor Trust
This grantor trust builds a flaw into the trust, intentionally freezing the individual’s assets and requiring the continued payment of income taxes. The estate reduces, but the beneficiaries receive the full value of the estate.
Irrevocable Life Insurance Trust (ILIT)
One way to preserve life insurance from taxes is to place it into a trust. The trust allows for the investment of benefits and to be given to the surviving family members.
Another way to protect an estate from taxes is to have a trust established as the beneficiary of an IRA account. This protects the needs of young children and adults with special needs.
Sometimes called an Illinois-type land trust, this trust places a trustee in charge of managing ownership of a real piece of property. The land is meant to benefit the beneficiary. Not only can these trusts be created by individuals for individuals, but this trust is often used by nonprofit organizations as well as corporations.
A married couple can create a trust that is meant to benefit the surviving family members after one spouse is dies. The estate assets transfer into the trust when the first spouse passes away. As the assets generate income, that money is given to the living spouse until death. Once both spouses are gone, the remaining money goes to the heirs.
Built to benefit a minor, this trust manages the assets until the minor reaches a specified age. At that age, the child gains control of the assets. The benefit of this trust is that all assets are placed in the trust and avoid an expensive guardianship. The grantor does not receive income from the trust assets.
Qualified Terminable Interest Property Trust (QTIP Trust)
Designed to protect the estate from a predatory marriage or for families with second and third marriages, this trust provides for a surviving spouse. The grantor can maintain control of the trust assets, even after death of surviving spouse.
Qualified Personal Residence Trust
A grantor may choose to place a group of assets into a trust, including their residence. The home can be transferred out of the trust, which takes away the value from the estate as a gift. The trust then allows the grantor to live at the residence for a set number of years without rent until the beneficiaries receive their money.
Special Needs Trust
This trust is set up under the standards of the Social Security rules, which allows trusts to provide for a special needs beneficiary. Better yet, beneficiaries of this trust should be able to still receive government benefits. The idea is for this trust to provide for special needs beneficiaries who might not have access to things such as education, eye glasses, transportation, equipment, etc.
At the end of the day, the goal of trusts may differ greatly person to person. You may wish to provide for a loved one, avoid probate, or donate your assets to a favorite organization. Sometimes, the main benefit might be avoiding certain taxes. No matter what your reasons, you should be able to create a trust that fits your goals.