There are different types of trusts. When adequately understood, they can be valuable for helping people manage their money, provide security for their families, and invest with confidence. Trusts allow one party, whether an individual or a company, to manage assets on behalf of others.
The person responsible for looking after these assets is the trustee, and the people for whom the assets are held in trust are the beneficiaries.
There are various trust types, so selecting the one that best aligns with your goals is essential. Here, we describe the main kinds of trusts and their purposes.
Top 10 Different Types of Trusts
Four primary trusts exist — living, testamentary, revocable, and irrevocable. Nevertheless, there are additional subcategories with various terms and potential advantages.
Here are some of the common types frequently utilized in estate planning. Trusts and specialized arrangements may be tailored to meet your specific requirements.
1. Living Trust
The grantor typically establishes a living trust during their lifetime by transferring property to a trustee. The grantor often has the authority to modify or revoke the trust. However, the trust becomes irrevocable once the grantor dies and cannot be altered.
Trustees are then bound by the guidelines outlined in the trust documents, which govern the distribution of assets and tax payments.
2. Testamentary Trusts
A testamentary trust is a type of trust created after one’s death, based on the instructions in their will. Because the terms of a testamentary trust are defined in the will and can be modified until the person’s death, this type of trust is often more straightforward and adaptable than a living trust.
3. Irrevocable Life Insurance Trust
However, any part of the estate exceeding this amount may be subject to a high tax rate. Life insurance is one of the estate planning types of trusts for assets exceeding the $11.7 million exclusion.
ILITs offer the grantor a flexible approach to planning and a tax-saving method by allowing the exclusion of the proceeds from both the estate of the first spouse to pass away and the surviving spouse’s estate.
4. Charitable Remainder Trust
This trust is a powerful estate planning tool for individuals who hold highly appreciated assets with a low basis, like stocks or real estate. By funding this trust with such assets, donors can sell them without facing capital gains tax.
Additionally, charitable remainder trusts are irrevocable types of trust, meaning they cannot be altered or terminated without the beneficiary’s consent. The grantor essentially relinquishes all ownership rights to the assets and the trust once it becomes irrevocable.
5. Qualified Domestic Trust
A qualified domestic trust is a unique trust that allows non-citizen spouses to receive the same marital deduction as other married couples.
Typically, a surviving spouse can benefit from a 100% marital deduction on estate taxes for assets, meaning they pay no taxes on these assets without any limit.
However, the marital deduction is not applicable if the living spouse is not a U.S. citizen. The qualified domestic trust is a mechanism to address this limitation.
6. Special Needs Trust
This trust is the best type of trust to protect assets. It’s a legal arrangement designed to provide financial support to individuals who are physically or mentally ill or chronically disabled without jeopardizing their eligibility for public assistance programs.
These programs often have specific income and asset limits, and funds placed in a special needs trust do not impact the individual’s eligibility for such assistance.
7. Grantor Retained Annuity Trust (GRAT)
(GRAT) is an irrevocable type of trust established for a specific duration to reduce taxes on substantial financial gifts to family members or other beneficiaries.
The person creating the trust (trustor) covers the taxes on the assets when the trust is formed and receives an annual annuity payment throughout the trust’s term. At the end of the specified period, the remaining assets go to the beneficiaries.
8. Spendthrift Trust
This trust shields inherited assets from the risk of a beneficiary’s financial recklessness. As the assets in the trust are owned by the trust itself, the beneficiary and their creditors cannot directly access or control these assets.
Instead, the trustee in these types of trust funds can determine how the trust assets will be distributed. For instance, the trustee may specify an annual amount or dictate the purpose for which the money can be spent.
9. Generation-Skipping Trust
As the name implies, a Generation-Skipping Trust bypasses the children of the person who created it and directly benefits the following generation, such as grandchildren. The trust is not owned by the generation it skips, ensuring its assets go directly to the intended beneficiaries.
10. Totten Trust
A Totten Trust, also known as a payable-on-death account, is a straightforward type of trust that allows a beneficiary to receive the trust’s assets directly upon the grantor’s death. While the grantor is alive, they can deposit and withdraw funds from the trust.
Additionally, the grantor can modify the beneficiary if necessary or desired.
Work With a Reliable Estate Planning Attorney
A trust can serve as a valuable estate planning tool with various advantages. Nevertheless, a trust can be intricate and may only suit some people’s situation. It is crucial to consult with an attorney to assess the potential benefits of trusts and determine whether a trust aligns with your estate planning requirements.
The law office of Cristy J. Carbón-Gaul provides comprehensive estate planning services and is well-versed in all types of trusts. With expertise in wills, trusts, and probate, we help clients secure their assets, protect their legacies, and ensure their heirs and successors are cared for. Trust us to safeguard your family’s future.