Trust
The four main types of trusts are:
- Living;
- Testamentary;
- Revocable; and
- Irrevocable.
However, there are further subcategories with a range of terms and potential benefits.
Types of Trust
Here are some of the different types of trusts that are commonly used in estate planning. Keep in mind that there are many more types of trusts and specialized arrangements that are not mentioned here and may suit your needs.
Charitable Trusts
A charitable trust is an irrevocable trust that is set up to simultaneously benefit you, your beneficiaries and a qualified charity under IRS rules. There are two primary types of charitable trusts: charitable lead trusts (CLTs) and charitable remainder trusts (CRTs).
Charitable Lead Trust
Also called a charitable lead annuity trust (CLAT), this trust is set up to provide financial support, through an annuity, to the chosen charity or charities for a specified period of time. The remaining assets eventually go to the beneficiaries.
Charitable Remainder Trust
Also called a charitable remainder annuity trust (CRAT), this trust works like the opposite of a CLT. A CRAT can create an income stream for you and for beneficiaries with an annuity for a specified period of time, with the remainder of assets going to charity.
Qualified Terminable Interest Property Trust
A qualified terminable interest property (QTIP) trust is set up to provide income for a surviving spouse and for the grantor to control assets after the death of a spouse. QTIPs may be useful when beneficiaries exist from a previous marriage and the grantor dies before the subsequent spouse.
Irrevocable Life Insurance Trust
Life insurance proceeds will usually avoid probate, but for certain wealthy individuals, a life insurance benefit may be included in the estate for tax purposes. An irrevocable life insurance trust (ILIT) can be used to exclude life insurance proceeds from the taxable estate and to transfer the death benefit immediately to beneficiaries.
Grantor Retained Annuity Trust
A grantor retained annuity trust (GRAT) is an irrevocable trust that is set up for a certain period of time to minimize taxes on large financial gifts to family members or other beneficiaries. The trustor pays the taxes on the assets when the trust is established and receives an annual annuity payment for the term of the GRAT. When the established term ends, the beneficiaries receive the remaining assets.
Irrevocable Funeral Trust
An irrevocable funeral trust is used to set aside money to cover burial and funeral costs. The funeral home sometimes serves as the trustee. Funeral trusts are typically funded with cash, bonds or life insurance. State laws very, so consider consulting an attorney about your options.
Spendthrift Trust
A spendthrift trust protects inherited assets from the potential of financial irresponsibility of the beneficiary. Since the assets in the trust belong to the trust, the beneficiary and the beneficiary’s creditors do not have direct access or control of the trust assets. The trustee has the discretion to decide how the trust assets will be distributed. For example, the trustee may choose a certain dollar amount per year, or they may direct what the money can be spent on.
Special Needs Trust
Similar to a spendthrift trust, a special needs trust allows the trustee to decide and direct how the assets of the trust can be used for a beneficiary. These trusts are commonly used for dependents with special needs, such as a child, sibling or parent who is disabled or otherwise unable to provide for their own financial needs.
Generation-Skipping Trust
As the name suggests, a generation-skipping trust will skip over the children of the grantor to the generation following them. For example, if you want to provide for the financial well-being of your grandchildren, this trust passes directly to them and is never owned by the generation it is skipping.
Totten Trust
Also known as a payable on death account, a Totten trust is a simple form of trust that enables a beneficiary to directly receive the assets of the trust upon the death of the grantor. The grantor can add and withdraw funds from the trust while they are living. The grantor may also change the beneficiary if needed or desired.
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Frequently Asked Questions
What is a trust and how is it used in estate planning?
A trust is a legal arrangement where one party holds assets on behalf of another. It's commonly used for managing assets, reducing taxes, and avoiding probate.
What are the different types of trusts available?
There are various types including living trusts, testamentary trusts, revocable and irrevocable trusts, each serving different purposes.
What are the benefits of creating a trust?
Trusts offer benefits like asset protection, tax advantages, and control over asset distribution after death.
How does a trust differ from a will?
Unlike a will, a trust can offer more privacy, avoid probate, and provide more detailed control over asset distribution.