Estate and Probate Resource Center
TYPES OF TRUSTS

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A trust is a legal arrangement by which the settlor (person creating the trust) creates in a third party (trustee) the power to hold an asset for the benefit of the beneficiaries. Fundamentally, a trust allows the trustee to control the assets of the trust (trust res) for the benefit of the trust's beneficiaries. Assets of the trust are managed pursuant to the terms of the trust, after title to each asset specified in the trust is legally transferred to the trust. If title is not transferred to the trust, the trustee has no legal authority to manage the trust property for the benefit of the beneficiaries.

Where the terms of the trust are not specified, state law will provide the terms of the trust. This is similar to the rules of intestate succession, which a state applies there is no will or when the will is improperly created.

Click here to read an article about the IRS and Trusts which the IRS considers suspect.

Charitable Trust

A charitable trust is established to provide support to specified charities, during the decedent's life or after death. By forming a charitable trust, the decedent's estate is allowed a deduction for the value of property donated to a qualified charity. If a gift is made during a person's life, the donor is entitled to an income tax deduction. Such a donation also reduces the taxable estate, reducing the taxes owed by the decedent's estate.

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Children's Trusts

These trusts merely prevent children from receiving their inheritance before the decedent wishes. There are income tax consequences to consider when making Children's Trusts. Failure to create a trust for a minor child will force their inheritance to be governed by a court-appointed guardian during their minority and to be distributed outright at the age of 18. Through the use of a children’s trust, one can specify the ages at which they want their child(ren) to receive distributions of the principal (e.g. 25, 30, 35) based upon their health, education, maintenance and support needs. Additional restriction may be added.

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Credit Shelter Trusts

The Credit Shelter Trust is the simplest method of protecting both spouses’ $1,000,000 lifetime exemptions. This allows a married couple to shelter a combined $2,000,000 in assets from estate tax, regardless of which spouse dies first, assuming that their Credit Trusts are fully-funded. This type of trust is generally established to reduce the amount of estate taxes owed upon the death of the surviving spouse. This type of trust generally distributes 100% of the trust's income to the surviving spouse, in addition to the principal (of the trust) as necessary for the surviving spouse's "health, education, maintenance and support." The amounts do not reduce the "unified credit." At the death of the surviving spouse, the remaining trust property may be held in trust for children and grandchildren.

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Discretionary Trust

A discretionary trust is a trust where the trustee has great latitude in paying out the and/or investing the assets of the trust for the benefit of the eligible beneficiaries.

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Irrevocable Life Insurance Trusts

These trusts are established to allow a decedent's life insurance to be kept out of the "gross estate" by making the life insurance trust the beneficiary (for a preexisting life insurance policy) or by making the trustee the owner of the new life insurance policy for the benefit of the beneficiaries of the trust. As payments are made to the trust, instead of a person, the payments are not part of the estate. Because it is the "gross estate" which is taxable, the amount of death taxes owed by the estate is reduced. This type of trust is irrevocable..

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Living Trusts

A living trust is to created during the lifetime of the settlor and may be established for the benefit of the settlor and/or other beneficiaries.. This can help avoid probate of the estate by courts. It offers no tax advantages over trusts created by wills.

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Pour Over Wills

The Pour Over Will covers assets not protected or under the control of the Living Trust.  Items not included in the living trust are subject to probate and taxable, however, with a Pour Over Will, the assets subject to probate will be only those assets not identified as trust assets.  The Pour Over Will indicates the deceased's intent, which was to include the forgotten assets in the trust for distribution as part of the trust estate.

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"QTIP" Trusts

A QTIP Trust is a trust that provides a surviving spouse with trust income during his or her lifetime and passes the remaining trust principal to the decedent’s children at the surviving spouse’s death. This type of trust is often selected by the client in a second marriage who wants to maintain control over the ultimate distribution of the trust asset(s). In other words, the surviving spouse’s interest in the trust terminates at death and he or she has no power to appoint their interest, leaving the remainder beneficiary designation up to the decedent.

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Spendthrift Trust

A spendthrift trust is created where the grantor allows the trustee to use discretion in making distributions to a beneficiary who handles money poorly (i.e. a spendthrift). Those provisions are referred to as 'spendthrift provisions.' Such a provision allows the trustee to pay money to third parties, rather than directly to the beneficiary, as long as the payment benefits the beneficiary. The trustee may also withhold any and all payments, when deemed appropriate. Another benefit of spendthrift provisions is creditor protection. Beneficiaries are protected from creditors because creditors cannot attach payments before the trustee makes payments to the beneficiary.

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Support Trust

A support trust is a trust created to provide the means for the education, health care, and general support of the beneficiary. The trustee is directed to distribute only so much of the income and principal as is necessary for the specified support. The difference between this and other trusts is that the needs of the beneficiary are taken into account when determining the level of payments to the beneficiary.

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Totten Trust

A Totten Trust is also known as a payable-on-death account. The trust is owned and controlled by the grantor during his or her lifetime. Money can be added or removed by the grantor, as the grantor wishes, with the beneficiary having no opportunity to stop the actions of the grantor. The beneficiary, specified during the life of the grantor, does not obtain control of the account until the grantor’s death. Note that the beneficiary may be changed during the life of the grantor..

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"Contingency" Trusts

There are other trusts, which can be created to meet unforeseen contingencies faced by the estate upon the decedent's death.  Such contingencies include the death of the person inheriting assets according to the terms of a trust prior to the termination of the trust, when heirs are left.  There are other contingencies that may be considered, which we would be happy to discuss with you.

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