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An Overview of Different Types of Trusts

March 5, 2024.

An Overview of Different Types of Trusts

What Is a Trust?

A trust is a fiduciary relationship in which a grantor gives a trustee the authority to hold assets for the benefit of one or more beneficiaries. By law, trustees must disperse these assets following the grantor’s instructions.

Real estate, financial accounts, life insurance, annuity certificates, personal property, business interests, and other assets are frequently used to establish a trust.

Trusts can be organized in various ways, defining how and when assets are transferred to beneficiaries.

The grantor and trustee have a legal obligation to operate in the beneficiary’s best interests.

Grantor

The grantor is the individual or organization that sets up the trust. The grantor determines how their assets will be distributed and managed.

Trustee

The trustee is the person or entity in charge of managing the trust. The grantor frequently appoints the trustee from among family members, friends, an attorney, an accountant, or a financial professional.

Among the trustee’s responsibilities are:

  • Acting as Fiduciary. The trustee has a fiduciary duty to act in the beneficiary’s best interest.
  • Investing the Trust Assets. The trustee is responsible for investing the assets of the trust. The investment can include purchasing real estate, bonds, and stocks within specific parameters specified by state law (and/or the trust document).
  • Keeping Accurate Records of All Transactions Involving the Trust. These documents include an accounting of trust revenues and expenses. Changes in financial status or circumstances must also be reported by the trustee as soon as known.
  • Preparing Tax-Related Forms and Ensuring Taxes Are Paid Properly and on Time. The trustee may be required to file tax forms on the trust’s behalf, depending on the trust agreement’s status and directives.
  • Administering the Trust in Accordance With the Grantor’s Wishes. The trustee must keep detailed records of all transactions and allocate assets as needed.

Beneficiary

The beneficiary is the individual(s) or organization that benefits from the trust. They are entitled to distributions of trust assets and other benefits such as health care coverage.

There are two types of beneficiaries:

  • Primary Beneficiaries. The person or organization who will receive the first distributions from the trust.
  • Contingent Beneficiaries. The people or organizations who stand to benefit after the primary beneficiary has received their share of the trust’s assets.

Types of Trusts:

Trusts are categorized into numerous types. The most common of which are revocable and irrevocable trusts.

Revocable Trusts

A revocable trust permits the Grantor to make adjustments anytime for as long as he/she is mentally competent.

Irrevocable Trusts

An irrevocable trust is a more permanent arrangement that cannot be changed or revoked once it has been set up (with limited exceptions, such as a court order).

Special Types of Trusts

There are many types of trusts that offer unique benefits for different assets or beneficiaries. The grantor’s objectives will determine the type of trust to choose. Some of the most popular trusts are as follows:

Living Trusts

Living trusts enable you to transfer assets into a trust throughout your lifetime and retain control until death. After that, the trustee will distribute the assets following your instructions.

Suppose you have substantial real estate holdings or other property that may require an estate settlement process. In that case, this can be a practical approach to avoid probate after death.

Testamentary Trusts

A testamentary trust is a form of trust established as part of a will. A grantor makes instructions in their will for a named executor outlining how their assets should be managed by a trustee and transferred to beneficiaries.

Asset Protection Trusts

Asset protection trusts are designed to protect a grantor’s assets from creditors and other parties entitled to claim against them (however, they are only allowed in certain states).

Blind Trusts

Blind trusts are set up to conceal the grantor’s assets and limit the grantor’s involvement in their management. These trusts are frequently employed by politicians or public officials who wish to avoid the appearance of a conflict of interest.

Bypass Trusts or Credit Shelter Trusts

Credit shelter trusts are another name for bypass trusts. Married couples widely use these trusts to cut estate taxes and pay for both spouses if one dies. The IRS (Internal Revenue Service) permits married couples to avoid paying inheritance taxes by leaving their estates to each other.

Charitable Trusts

Charitable trusts are established to provide financial assistance to a specific charitable organization or cause. These trusts are intended to allow donors to provide money while still having some say over how it is spent.

Generation-Skipping Trusts

Generation-skipping trusts are designed to provide for grandchildren or other remote descendants without subjecting the assets to taxes.

Insurance Trusts

Insurance trusts are established to keep life insurance policies and ensure that the earnings flow straight to the trust’s beneficiaries rather than becoming part of the estate.

Marital Trusts

Marital trusts are intended to provide for a spouse following their partner’s death. This trust transfers assets to the surviving spouse without subjecting them to federal estate taxes.

Qualified Terminable Interest Property (QTIP) Trusts

The QTIP trust is established in various ways, the most common of which is when a spouse already has children from a prior marriage. In this situation, the grantor may wish to leave assets to their present spouse or partner while also providing for former family members.

Special Needs Trusts

Special needs trusts are intended to safeguard the assets of people with disabilities. These trusts enable beneficiaries to obtain government benefits while retaining their inheritance or other assets.

Spendthrift Trusts

Spendthrift trusts are established to preserve the trust’s assets from creditors and imprudent spending by trustees and beneficiaries.

Totten Trusts

A Totten trust is a bank account opened by the depositor as trustee for a named beneficiary. A Totten trust can be canceled by:

  • Withdrawing all funds from the bank account
  • Making an express revocation in writing during the depositor’s lifetime
  • Death of the beneficiary

 

Final Thoughts

While there are many benefits to using a trust, it is essential to consider the cost and complexity associated with setting up and maintaining one before making any decisions.  It is also prudent to work with an estate planner and other qualified financial professionals during this evaluation process as well.

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References

Tamplin, True.  “Types of Trusts”.  Overview of the Different Types of Trusts | Finance Strategists.  March 5, 2024.

The information in this article is general in nature and for informational purposes only.  None of this information is intended to be personalized (and tailored to an individual’s unique circumstances) and should never be construed as specific tax, legal or financial recommendations.  Before making any financial decisions, you are strongly encouraged to first consult with a qualified financial professional.

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