Types of Trusts
Protecting your assets so that you can easily pass them to others should be a goal for anyone who has worked hard for many years. There are a variety of ways to do this, including:
- Holding joint title to real estate
- Setting up joint bank accounts
- Obtaining a life insurance policy
- Drafting a will
Another way is to set up a trust—or several, as there are many types of trusts to serve your particular needs.
Trusts are a part of overall estate planning strategy. They set aside assets for your beneficiaries and can be managed by someone for their benefit. Trusts offer protection for you and your family and a means of avoiding or deferring certain taxes.
Elements of a Trust
A trust consists of a grantor, who provides the assets; a trustee, who manages and administers the assets pursuant to the grantor's instructions; and a beneficiary, who receives the benefit of the trust.
Types of Trusts
There are generally two types of trusts—a testamentary trust and a living trust. A testamentary trust is set up in a will and takes effect on your death. A living trust is effective during your lifetime and can continue after you pass away.
You can transfer title and assets to a living trust, or remove them and then provide for any additional assets or property to transfer in a "pour-over" will once you pass away.
Other types of trusts include:
- A simple trust determines how the trustee distributes income to the beneficiaries who have an immediate right to the grantor's income and capital left by the grantor. No assets in these trusts continue to earn income after the grantor dies.
- A complex trust contains provisions for charitable gifts and an income stream or other types of distribution. It does not pay its current income to the beneficiaries.
- A revocable trust is a living trust since it can be changed at any time through an amendment and restatement, or entirely revoked. It does become irrevocable on the grantor's death.
- A spendthrift trust protects the beneficiary from creditors by not compelling the trustee to make payments, or distributions, to the beneficiaries or their creditors.
- Special needs trusts are for disabled beneficiaries and should not interfere with any public benefits the beneficiary is receiving.
- With animal trusts, assets are placed with a trustee to care for a pet after the grantor's death. The asset's value cannot be excessive, or the court may modify the trust.
- Charitable trusts are established to benefit a charity or for a public or social cause. They can reduce or avoid estate and gift taxes.
There are many other types that your trusts and estates attorney can explain and set up for you depending on your tax situation, state tax laws, your relationships, and the value and type of your assets.