Four Types of Trusts You Need to Understand — Before It’s Too Late

A trust is essentially a legal document that establishes a relationship for assets to be held or managed on behalf of someone else. Many of us have heard about a trust but not everyone knows the difference between the different types of trusts and how they operate. Learning about the different trust options available will help you figure out what kind is best for your needs.

Trusts Terminology: Grantor, Trustee, Beneficiary

The first thing you may want to do is familiarize with the three key players involved in a basic trust. Who creates the trust is called the grantor. They may also be referred to as the settlor or trustor. The grantor can be a person or an entity such as an organization. Trust&Will has a great article explaining the grantor’s role in estate planning.

The trustee is the person or entity who manages the assets that are in the trust. The person can even be the grantor in some situations and they can name a successor trustee to take over the responsibility in the event they cannot (usually incapacitation or death). Common entities named as trustees are banks.

The beneficiary receives the benefit of the trust. They will receive the property, profits, money, or whatever asset is being managed in the trust document. A lot of people name children or family members as beneficiaries and others name entities like charities. Let’s get into some of the common types of trusts.

Revocable/Living Trust

Revocable trusts have many nicknames such as living trust, inter vivos trust, or the loving trust. The reason it’s associated with life is because it’s a trust created during the grantor’s lifetime. It can be drafted in a way that lets the creator revoke or make changes to the trust. As described in Investopedia’s article, the grantor can have a lawyer draft it to be able to make changes to the instructions of the trust and how it’s managed, remove assets named in the trust, or terminate the trust altogether.

Irrevocable Trust

Irrevocable trusts, as the name suggests, cannot be changed or revoked by the grantor once it is created. The creator of an irrevocable trust is giving up control over the assets that are placed in it. The beneficiary is the only one able to make or approve of changes. When it comes to estates, grantor’s benefit from irrevocable trusts because it relieves them of certain tax liabilities. Since the grantor is surrendering control over the assets, those assets are no longer part of the grantor’s taxable estate. They are free from the estate’s property taxes as well as any income the property may generate.

Charitable Trust

Charitable trusts are a type of irrevocable trust and one many of us hear of. These types of trusts are established for some charitable purpose. Many donors enjoy establishing a charitable trust because it is essentially a win-win situation. The charity receives money and the donor gets a tax-break! Western and Southern Financial Group discuss charitable trusts in more detail. Two primary types of charitable trusts are lead trusts and remainder trusts.

Charitable lead trusts essentially have the donor continue control. Anything that comes from the trust’s assets (money), either goes directly to the charity or it is divided between the charity and the donor’s beneficiary. This also reduces a beneficiary’s liability for taxes once it is inherited.

Charitable remainder trusts have the donor give-up control for a specific amount of time. The assets can be given for periods that last a few years or even beyond the donor’s death. This allows the donor to have the trust’s assets be distributed to beneficiaries for a set amount of time and then have the remainder given to a charity or vice versa.

Testamentary Trust

Testamentary trusts are created within the grantor’s last will so it does not go into effect until the grantor’s death. People usually make testamentary trusts for their children. Assets like money or property are left in this trust to be managed by another adult (trustee) until the child becomes an adult. It can even have conditions that a person must meet before receiving the benefit of the trust. This usually helps grantor’s ensure their beneficiaries will be taken care of after they are gone.

Spendthrift Trust

Spendthrift trusts prevent beneficiaries from being irresponsible with the assets placed in the trust. The language of a spendthrift provision in a trust stops the beneficiary from both accessing assets in the trust such as money, as well as not promising the funds from the trust to creditors. However, once funds are given to the beneficiary, a spendthrift trust does not prevent creditors from having availability to it. A trustee can have payments distributed to the beneficiary monthly, yearly, or on a discretionary basis. For example, giving a certain amount of money for certain needs as the trustee sees fit. That is why it is extremely important to have your lawyer carefully outline the trustee’s control and power within the terms of the trust.

Now that you have a better sense of what trust you may want to create, head over to www.sleegal.com and let us find you lawyers to get it done!

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