Trusts are a great way to protect your assets from probate, and put your family or loved ones in a secure position after your passing. But if your knowledge of trusts ends there—and especially if you are planning on creating a trust at some point—this article provides you with a basic introduction to trusts. Let Peacefully be your guide to which type of trust you may want to select depending on your situation. 

First, some definitions.

A trust is a legal arrangement involving three parties: the trustor (also known as grantor or settlor), the trustee, and the beneficiary. The trustee, a third party, is appointed by the trustor to supervise the assets in trust for the benefit of the beneficiaries. If you are establishing a trust for the benefit of your children and putting it in the care of your attorney, you are the trustor, your attorney is the trustee, and your children are the beneficiaries.

There are four main categories of trust which most types of trusts fall under: living trust, testamentary trust, revocable trust, and irrevocable trust. 

Living Trust vs Testamentary Trust

A living trust, also known as an inter vivos trust. It is created during the lifetime of the trustor. A living trust may be revoke or irrevokable. The transfer of assets from the trustor’s estate to the trust happens while the trustor is alive. Depending on the terms of your trust, the trustor can still access certain assets in the trust, such as cash and real estate property. Since the assets within the trust are not considered a part of the trustor’s probate estate, they are not subject to probate once the trustor passes away. A living trust allows you to keep your estate private and bypass the lengthy probate process. 

A testamentary trust is created when the trustor passes away. It is created by a provision made in the trustor’s will that instructs the executor of the estate to establish the trust. If the will goes through probate, the establishment of the trust is significantly delayed. This also means that the assets in the trust are not protected from the probate process. There would be a risk that property may not be distributed in the way that the trustor initially desired. One would typically only choose to create a testamentary trust because the court’s involvement in the trust allows for greater oversight.

Revocable Trust vs Irrevocable Trust

A revocable trust refers to the fact that the assets in the trust are still under the ownership of the trustor. This means that any revenue created by the trust must still be reported on the trustor’s personal taxes. The trustor maintains the right to modify or “revoke” the trust at any time.

This type of trust is usually set up to benefit the surviving spouse after the death of the Trustor. Though this trust has obvious advantages in terms of the flexibility granted to the Trustor, it also contains significant disadvantages. Among them are the fact that the trust does not provide protection against creditors, and that assets in the trust are included under the wealth of the trustor for purposes of determining Medicaid eligibility, personal income tax, and estate or gift tax. (To find out the steps involved to revoke a revocable trust, click here.)

When an irrevocable trust is established, the trustor relinquishes ownership of the assets in the trust while still living. This means that the trust cannot be modified by the trustor without the permission of its beneficiaries. A testamentary trust is a form of irrevocable trust because the trustor cannot make modifications to the trust. This type of trust offers tax advantages and asset security for those with large or complex estates.  

Why Should You Create a Trust?

Creating a trust may offer certain advantages in planning your estate. Depending on the uniqueness of each trust, here is why you may consider setting up a trust:

• Ensuring that your assets are managed for the benefit of your spouse or children according to your specific wishes, since, through a trust, you can control when and to whom distributions of your assets are made. 
• Minimizing taxes and probate costs that are associated with transferring your assets through a will (applicable in the case of a living trust).
• Protecting your assets and legacy, as a trust can help protect your estate from beneficiaries who may not be adept at money management as well as your heirs’ creditors.
• Establishing a set of requirements that beneficiaries must meet if they wish to receive their inheritance.

The next step is to look at what type of trust you should create based on your personal circumstances. 

Finding the Right Trust for You

Trusts come in numerous forms. Each of them contains unique advantages, purposes, and legal conventions.

• If you are a married couple, you may want to take a look at the following types of trusts (or read more about each by clicking here):
  • Marital Trusts – also known as the “A” Trust
  • Bypass Trusts – also referred to as the “B” or Credit Shelter Trusts
  • Qualified Domestic Trust
  • QTIP Trusts
• If you are looking for a trust that lowers your taxable income and helps you qualify for benefits, refer to the following types:
  • Medicaid Trusts
  • Special/Supplemental Needs Trusts
  • Grantor Retained Income Trust
• If you would like to create a legacy of giving within your estate plan by donating to charity, there are two types of charitable trusts that you may want to consider:
  • Charitable Lead Trust
  • Charitable Remainder Trust
• If you would like to protect your assets from paying an estate tax twice, you can leave them to your grandchildren instead of your children using a Generation-Skipping Trust. 
• If you have concerns about your children misusing your assets, you should take a look at the Spendthrift Trust. 
• If you would like a simple and flexible way of removing funds from your estate, you should establish a Totten Trust. 
• If you would like to have more control over your insurance policies and the money that is paid from them, you should create a Life Insurance Trust
• If you want to lower estate taxes on your home, you should look into a Qualified Personal Residence Trust.
• If you’re the victim of a crime, look into whether you should establish a constructive trust.
• If you’re a politician, corporate executive, recent lottery winner, or have other complicated relationships to your investments, you might consider a blind trust
• Finally, If you would like to make sure your beloved pet is taken care of after your death, you should look into Pet Trusts. 

Keep in mind that you can create more than one trust, but you should consult with a professional before deciding to do so.

Ready to create your Trust or Will? Sign up for Peacefully today, for free!