Types of Trusts
What Is a Trust?
In short, a trust is a legal document that holds assets. A trust can be created while someone is alive or can be created by a will after their death. They offer a way to hold assets and dole them out in a set way. The people who benefit from the trust are called beneficiaries, and they will receive financial benefits from the trust without owning the assets held in the trust. The trust maker is the person who creates the trust. In this article, we will discuss the common types of trusts. Each type of trust will have unique rules and uses; consider which one is best for your circumstances.
Types of Trust
Irrevocable Trust
An irrevocable trust is permanent. Once the assets are transferred into the trust, nobody can remove the property from the trust. This type of trust is commonly used for life insurance benefits to be split between multiple parties. Because of the permanent nature of this type of trust, you need to consult an attorney before you make it. There might be other trusts that would be more suitable for your needs.
Revocable Trusts
A revocable trust is often also called a living trust. They are created while the trust-maker is still alive and may be changed or revoked entirely. Often the trust-maker is the initial beneficiary in a bid to circumvent probate laws or to provide financial resources for medical care if they become incapacitated.
It is important to note that the assets in the trust can still be seized by creditors or otherwise seized in legal actions. The trust does make it a little more difficult, but it is not impossible.
Upon the trust-makers death, the trust will become irrevocable as the trust-maker is not around to make changes.
Charitable Trust
A charitable trust can be set up during the trust maker’s lifetime or following their death. It provides financial benefits to a particular charity or cause. It may take the form of regular donations, use of a particular asset like property, or even a scholarship fund. This type of trust will provide financial benefits like tax reductions during the trust maker’s lifetime.
Constructive Trust
A constructive trust is also sometimes called an implied trust. Usually, the court will establish this trust after the death of the “trust-maker” because they believe that the owner of the asset intended to give the property to a certain person or cause. The terms of the constructive trust will vary depending on the circumstances and the discretion of the court. The best way to avoid this is to ensure you set up a trust prior to death or leave clear instructions in your will. Speak to your attorney about how to conduct proper end of life planning.
Asset Protection Trust
This type of trust protects assets from the claims of any future creditors. While creditors you owe can claim assets in a trust created after you entered into a contract with them, with the right type of asset protection trust, future creditors may not be able to claim your trusts. These are often set up in foreign jurisdictions, so ask an attorney to help you to create this type of trust.
Spendthrift Trust
A spendthrift trust is designed for longevity and does not allow the beneficiary to give away or sell the assets. It is also protected from the creditors of beneficiaries as long as the assets are held in the trust.
This type of trust is used to take care of beneficiaries who are bad with money or, most often, young people. The trust may have terms where the assets will be signed over to the beneficiary in certain circumstances such as marriage or when they reach a certain age.
Special Needs Trust
Someone who receives government benefits often cannot exceed a certain limit for income or assets. This type of trust allows the trust-maker to provide for them without disqualifying them for necessary benefits. Under normal circumstances, an inheritance or even gift would disqualify someone receiving government benefits from continuing to receive them. For those who require specialist care or housing, this could be devastating. As long as the beneficiary does not control the trust distributions, the Social Security laws allow this.
The special needs trust could provide additional benefits like paying for additional care or assistance or even luxury items that the beneficiary would not normally be able to afford. Often the trust will have terms that amend or terminate the trust if it would impede the beneficiary’s government benefits.
There are strict rules and legal definitions surrounding who may benefit from a special needs trust, so contact an attorney if you plan to establish this type of trust. They are most commonly used by parents or grandparents of disabled children to ensure their children continue to receive care. If you are a disabled person and expect to receive a large sum of money, then you can set up a special needs trust for yourself. Speak to an attorney about how to do so and weigh the pros and cons.
Tax By Pass Trust
Estate tax laws allow shared assets to be passed onto the surviving spouse tax-free. However, when the surviving spouse dies, then the asset is taxed. The beneficiaries would have to pay significant estate taxes before they have to receive it. Depending on the value of the estate and the types of assets, this may be as high as 55% of the estate.
Rabbi Trust
The Rabbi Trust is a type of irrevocable trust used by employers to fund their benefit obligations to employees. Once they put the assets or funds in the trust, the employer cannot take them out if they change their mind. This means that employees have peace of mind for benefits that are not legally mandated. This type of trust is not protected against creditors in the case of bankruptcy or insolvency.
Totten Trust
A totten trust is one of the best ways to pass assets to family members while avoiding probate. It cannot be used with real property, though. These cost no money to establish and do not even need a written trust. There are specific rules to follow in creating and naming this type of trust, though.