What Kinds of Trusts Are There?

Trusts are versatile tools that help individuals manage their assets both during their lives and after their death. They provide a structured way to distribute wealth according to specific goals or family needs. Understanding the different types of trusts is key to determining which suits your situation.

The Different Types of Trusts & What They Provide

Trusts can be categorized into two primary types: revocable and irrevocable. Within these categories, there are numerous trusts tailored to address different needs:

1. Living Trusts: This is also known as a Grantor Trust, and Revocable Trust.  Established during the grantor’s lifetime, these trusts help manage assets while the grantor is alive. They can be modified or revoked if structured as a revocable trust or made permanent as an irrevocable trust.  These revocable trusts become irrevocable when the grantor(s) die.  At death property is distributed to beneficiaries or managed on an ongoing basis.  Your preferred instructions guide the plan to give out or continue to oversee assets.
2. Testamentary Trusts: These trusts are created through a will, but it is essential to remember that they do not take effect until after you have passed away. (This is atypical for a trust.) People use them to safeguard assets for minors or to manage distributions to beneficiaries over time.
3. Charitable Trusts: These trusts allow the grantor or their estate to contribute to charitable organizations and often receive tax benefits. Common examples include charitable remainder trusts, charitable annuity trusts, and charitable lead trusts.
4. Special Needs Trusts: Also referred to as supplemental needs trusts, these are designed to ensure that you can allocate assets for the benefit of your family member while providing a layer of protection for those asset benefits.  This may be prudent for a beneficiary with a substance abuse issue, debt or bankruptcy issue, marital divorce concern or a disability without making that person ineligible for the government assistance they rely on. Many people may simply omit that beneficiary (out of a desire to protect them), but there are more efficient ways of accomplishing this goal.
5. Spendthrift Trusts: These trusts control the distribution of assets to beneficiaries. They include restrictions to protect the assets from creditors or irresponsible spending by the beneficiary.
6. Irrevocable Life Insurance Trusts (ILITs) hold life insurance policies separately from the grantor’s estate. This can reduce estate taxes while ensuring the proceeds are distributed according to your instructions.

Each trust type serves a specific purpose, and when you work with an attorney, you will select which one meets your needs based on your family, financial goals, and tax considerations.   

What Is a Revocable Trust?

This is a commonly used trust. It allows the grantor to maintain complete control over the trust’s assets during their lifetime. They give you the power to amend the terms and control the assets that go in (or out) of it, and you always dissolve the trust.

Revocable trusts are particularly beneficial in estate planning because assets owned by the Trustee bypass or avoid probate. Assets in a revocable trust transfer directly at the grantor’s death to beneficiaries according to the trust’s instructions, avoiding the public probate process. Another advantage of revocable trusts is that they prepare you for possible incapacity or incompetence during your lifetime to allow your other trustee(s) to privately and efficiently manage assets for your use while you are alive but not fully able to manage this yourself.  This can avoid the need for a guardian to manage those assets under the control of the court system.  If you become incapacitated, a successor trustee—named in the trust document—can step in to handle the assets without the need for court intervention.

 However, because the grantor retains control over the trust, its assets are still considered part of their available assets and taxable estate. Contrary to common belief, the trust does not shield the assets from creditors during the grantor’s lifetime.

Which One Is Right For You?

If you are interested in learning more about how trusts can enhance your estate plan, contact Attorney B. Joseph Causey, Jr. 

Trusts are powerful tools.  With nearly 30 years of experience in estate planning and probate law, l guide you through the options available. Schedule a consultation today to create a plan tailored to your needs and goals.