Just like cars, there are many different types of trusts out there for you to select. For those of you who aren’t familiar with the concept, here is a run-down; a trust is a legal arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries.
Most trusts are classified into one of two categories, living trust or testamentary trust. A living trust, (sometimes referred to as an inter-vivos trust) is set up while the grantor is still alive and is separate from the will. On the other hand, a testamentary trust, is created under the grantor’s Last Will and Testament, and by definition, becomes active only after the testators’ death.
I’ve outlined six commonly used trusts.
- Revocable Trust: a living trust that can be altered, changed, modified, or revoked entirely. If you set up a revocable trust, you can maintain control of the assets or property placed in the trust. This type of trust, when funded properly, can help you avoid the probate process entirely.
- Irrevocable Trust: a trust that cannot be altered, changed, modified, or revoked after its creation by the grantor. If you set up an irrevocable trust, you’re essentially transferring all your assets out of your control and into the trust. No one, including the grantor, can take the property out of the trust. This trust was more popular when the federal estate tax was much lower, we see fewer and fewer irrevocable trusts as they are very limiting.
- Charitable Trust: a trust which benefits a particular charity. If you set up a charitable trust, you can deduct a percentage of the amount contributed to the trust, as a current charitable income tax deduction. As the grantor, you can select the charitable trust to be either living or testamentary, but if you plan to make distribution while you are still living, the trust must be an irrevocable living trust.
- Special Needs Trust: a specialized living or testamentary trust that is made specifically for the benefit of those with physical and/or mental disabilities. This trust is created with the specific needs, lifestyle, and future of the beneficiary in mind. By setting up a special needs trust, you allow the disabled beneficiary to enjoy the use of assets being held in the trust for his or her benefit, while at the same time allowing them to receive essential government benefits.
- Generation Skipping Trust: a living or testamentary trust agreement in which the contributed assets are passed down to the grantor’s grandchildren. With this type of trust, the assets will skip over your children and go to your grandchildren or even great-grandchildren without being subject to Federal generation skipping tax (yes, that’s a real thing).
Now, more than ever, it’s important to understand your various trust options. A seasoned estate planning attorney can assess the situation and help you determine the best trust for you and your family.