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Different Types of Trusts

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Written by Troy Werner

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POSTED ON: February 5, 2020

In estate planning terms, a trust is both an agreement and an entity, created for the purpose of holding assets and accounts ‘in trust’ until they are ready to be distributed to designated beneficiaries. Trusts must be ‘funded’, which involves amending the assets mentioned within the trust document to reflect that they are now part […]

In estate planning terms, a trust is both an agreement and an entity, created for the purpose of holding assets and accounts ‘in trust’ until they are ready to be distributed to designated beneficiaries. Trusts must be ‘funded’, which involves amending the assets mentioned within the trust document to reflect that they are now part of the trust (i.e. changing the name on a title from ‘John Smith’ to ‘John Smith’s Trust’).

The anatomy of a trust is relatively simple, in most cases. There is a grantor (the person who creates and funds the trust), a trustee (one or more people in charge of managing the trust once the grantor is incapacitated or deceased), and a beneficiary (or several, including successor beneficiaries who will receive their portion of a trust if an original beneficiary passes away early).

As with all estate planning tools, trusts exist to provide a legal framework for the distribution of one’s belongings after death. A dead person does not have the right to possess anything, and as such, everything they own must be distributed among their next of kin. Tools like trusts give people the option to determine who gets what before they pass away. But even more than other similar tools, trusts provide an incredible amount of control over how and when one’s belongings are distributed, and different types of trusts can also be excellent financial tools.

Types of Trusts: Revocable and Irrevocable

Revocable and irrevocable trusts are set apart by their finality. Revocable trusts can be amended, and provide fewer protections. But it has a greater degree of control to the grantor for the assets funded into the trust. Revocable trusts put assets funded into them ‘in trust’. But do not allow these assets to be distinguished from the rest of your estate. As such, they still count as part of the estate, and count towards your estate’s total value (important for estate taxes).

Irrevocable trusts greatly limit the control the grantor has over the assets in the trust. They are effectively no longer the grantor’s property, and as such cannot be controlled anymore. However, they do not count as part of the estate either. Assets placed into an irrevocable trust are thus usually safe from litigation, bankruptcy, and creditors. All trusts are either irrevocable or revocable.

Living and Testamentary

Living trusts are more commonly covered, as they set themselves apart more clearly from wills. And living trusts go into effect the moment they are signed. While the assets within the trust are only distributed once the grantor has passed away, all other elements of the trust (such as separation from the estate, etc.) go into effect immediately. Meanwhile, testamentary trusts do not go into effect until the grantor has passed away. They can be useful in certain circumstances.

Creating a More Specific Trust

Because trusts are flexible, there are countless different types of trust templates that exist to provide a very specific benefit to one’s estate or immediate financial situation. Here are just a few examples.

A trust can make the most of your estate for generations to come. Trusts can ensure that your children can make use of their inheritance when they are a little wiser. Or to ensure that the assets you bequeath to your spouse go to your children and not another family in the future. Trusts can present you with many options.

Why Use Trusts?

In some media, trusts are boiled down into more complex, more expensive, and far more customizable wills. But they are very different from wills, and the two should not be conflated. While trusts usually aim to do the same as a will (set conditions on how belongings should be distributed after death), they do much more.

The most immediate benefit is the fact that assets within a trust completely bypass the probate process. This is a mandatory process that starts once a person petitions to probate a will after a loved one’s passing. A court goes over the will, provide time for creditors to file a claim against the estate. And to establish the value and contents of the estate, and oversee the estate’s distribution.

This process is time-consuming and often costly. An estimated 5 to 7 percent of an estate’s value can go into financing the probate process, with substantially more time and money being spent the larger and more complex the estate is, while smaller, simpler estates can even petition for an expedited process.

Trusts Are Complex

Trusts bypass this entirely, giving many the option of either slimming down the portion of their estate eligible for probate. Or to distribute the majority of their estate through trusts (although this can be difficult to finance, since trusts must be managed for years). Because the probate process is a public matter, trusts also ensure that whatever is funded into them does not become a part of the public record. If the grantor want to protect their privacy.

Trusts also provide ways to better protect an estate from both creditors and hefty taxes. It provides nominal methods to make certain assets untouchable for creditors, and ways to avoid estate taxes. If a lawsuit is impending, trusts also provide a way to stow away your important assets. Also to keep them safe from the potential losses incurred by litigation.

However, for all the options trusts provide, they can be very complex. Their flexibility comes at a price, and it can often take the skill and mind of an experienced estate planning lawyer to help you put together the best trust for your circumstances. Below are some of the basic distinctions in trust making, as well as a few specific trusts with special properties.

Trusts Are About Specificity 

Trusts cannot do everything, but they can do quite a lot. However, it would not be right to say that they are perfect for all situations. While different types of trusts are incredibly handy, they might not always be necessary, especially for simpler, smaller estates.

But once estates grow to a certain value, a tailored trust can help a grantor save their family and themselves a considerable sum of money and a lot of time. A trust’s strength is in its specificity. If you are interested in setting up a trust for your estate, it is important to discuss the idea with a professional rather than choose a pre-made template.

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