A trust is a legal contract between two parties to determine how property will be managed after death. The trust manages the property to benefit the deceased person’s beneficiaries. Depending on the type of trust, it may provide for specific beneficiaries, fund retirement accounts for employees, or even pay funeral expenses. Those beneficiaries maybe your spouse, children, other family members, or even close friends. There are many different types of trusts, each with its unique function. Below we discuss eleven common types of trusts.
11 Most Common Types of Trust
Although there are several 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. We’ve discussed the most common types of Trusts, so you know what’s best for you. First, you should understand the basic characteristics and parts of a Trust:
- Grantor: the person who creates and funds the trust
- Trustee: the person or institution who manages the trust
- Beneficiary: the person or people who benefit from the trust
Now that we understand the basic characteristics and parts of a trust, it’s time to look in detail at each of the major types of Trusts you can choose from.
Revocable vs. Irrevocable Trusts
A revocable trust, also known as a living trust, can be modified or dissolved at any time by the grantor. This type of trust is often used to avoid probate because it becomes irrevocable upon the grantor’s death.
An irrevocable trust is a type of trust that cannot be changed or modified without all of the beneficiaries consenting first. It may seem that Irrevocable Trusts are never a good idea, but they can be quite beneficial in certain instances. Most set up Irrevocable Trusts for tax considerations. Additionally, Irrevocable Trusts can be wise for those with a particularly litigious profession, as they can protect from lawsuits and creditors.
Living Trusts
A Living Trust is really just another name for a Revocable Trust. The terms are often used interchangeably. A Living Trust is simply a trust you set up during your lifetime. You, as the grantor, retain control over the assets in the trust. This means that you can revoke or change the trust at any time. If you have a Living Trust, your assets can be distributed without probate, saving time and money.
Joint Trusts
A Joint Trust is a trust that is set up between two people, usually a married couple. Both grantors have control over the assets in the trust and can make changes at any time. The advantage of a Joint Trust is that it can help avoid probate if one of the grantors dies. The assets in the trust will pass to the surviving grantor without going through probate court.
Testamentary Trusts
A Testamentary Trust, also called a “Will Trust” or a “Trust Under Will,” is a trust that is created inside a will. The primary function of this trust is to ensure that beneficiaries can only access trust assets at a predetermined time. It only goes into effect after your passing. Testamentary Trusts aren’t considered Living Trusts because the trust doesn’t exist until you pass away. Note that Testamentary Trusts will go through probate.
Charitable Trusts
A Charitable Trust is created to give money or assets to a charity. This is a type of Irrevocable Trust and can offer tax benefits while still generating income. When you set up a Charitable Trust, you appoint an organization to be the Trustee. A regular stream of income can be created as they invest.
there are two types of Charitable Trusts:
- Charitable Lead Trusts (CLT): With a Charitable Lead Trust, the charity receives payments (either fixed or variable) for a set number of years. At the end of the trust term, the assets are distributed to the non-charitable beneficiaries.
- Charitable Remainder Trusts (CRT): With a Charitable Remainder Trust, the non-charitable beneficiaries receive payments (either fixed or variable) for a set number of years. At the end of the trust term, the assets are distributed to the charity.
Special Needs Trusts
You may want to consider creating a Special Needs Trust if you have a family member with special needs. A Special Needs Trust is a type of trust that is designed to provide for the care of a beneficiary with special needs under the age of 65, who will need life-long care without disrupting their eligibility for government benefits.
AB Trusts
AB Trusts are trusts created for the benefit of two people, typically a husband and wife. The assets in an AB Trust are divided into two parts, “A” and “B.” The “A” trust is for the survivor’s benefit, and the “B” trust is for the decedent’s benefit.
AB Trusts are often used to minimize estate taxes. When the first person dies, their share of the trust (the “A” trust) passes to the second person without being subject to estate taxes. The second person can then use the assets in the “A” trust to pay any estate taxes due on their passing.
Asset Protection Trusts
An asset protection trust is a type of trust that is used to protect the assets of the person creating the trust (the “grantor”) from creditors. The grantor can transfer assets into the trust, and the Trustee will manage the assets to benefit the beneficiaries. Asset protection trusts can be costly to establish.
Spendthrift Trusts
This type of trust allows you to specify when and how the beneficiaries can access principal trust assets. Spendthrift Trusts are generally used when a beneficiary is either young or when someone has been financially irresponsible in the past. This type of trust can protect the assets from being used irresponsibly or taken by creditors.
Blind Trusts
With a blind trust, the grantor transfers assets to a trustee without knowing how the Trustee invests or manages the trust assets. The Trustee manages the assets for the benefit of the beneficiaries according to the terms of the trust agreement. Blind trusts can be used to avoid conflicts of interest or to keep investment decisions private.
Insurance Trusts
An insurance trust is a type of trust that is created to hold life insurance policies. The Trustee owns and manages the policy for the benefit of the beneficiaries. The Trustee can use the death benefits from the policy to pay for the estate’s expenses, fund charitable trusts, or for other purposes as specified in the trust agreement.
Bottom Line
A well-crafted estate plan will protect your interests and your beneficiaries. While a will is a crucial part of estate planning, a trust can ensure that your assets go to your loved ones without going through probate. However, before creating a will for yourself, consider the different types you can use.
Contact the Saanichton Law Group today for more information on the different types of trusts and how they can benefit you and your beneficiaries. Our team of experienced estate planning lawyers can help you create a customized plan that meets your unique needs and objectives. Call us today to schedule a consultation.
