Types of Trusts
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What Is a Trust?
A "trust" is a legal arrangement, typically used in estate planning, in which a property interest is held by one person (the “trustee”) at the request of another person (the “settlor”) for the benefit of a third person (the "beneficiary").
Trusts are extremely flexible and do not require many of the old-fashioned formalities still necessary to draft a will, or the added trouble of having the estate go through probate. For this reason, trusts are actually the most widely used estate planning tool.
What Are Some Common Types of Trusts?
Trusts come in a variety of forms and can be established in many different situations. The most common forms of trusts include:
- Asset Protection Trust: A trust designed specifically to protect assets from the settlor’s creditors.
- Bypass (or AB) Trust: A trust created to allow one spouse to leave money to the other. Bypass Trusts limit the amount of federal estate tax that would be payable on the death of the second spouse.
- Charitable Trust: A trust established to benefit a particular charity or the public. Charitable Trusts are often used to lower or avoid imposition of federal estate and gift taxes.
- Clifford (or Short-Term) Trust: An irrevocable trust set up for at least 10 years and one day, where the income from the trust property is paid to the beneficiary, but the property itself reverts back to the settlor when the trust expires.
- Crummey Trust: A trust that gives the trustee power to distribute or accumulate trust income and the beneficiaries the right to withdraw an amount up to the annual gift tax exclusion within a reasonable time following deposit. Crummey Trusts are often used when the beneficiaries are minors, but unlike other trusts does not grant a right total access upon the beneficiary reaching a certain age.
- Custodial Trust: A revocable trust that names a custodial trustee to manage the assets of an incapacitated or disabled beneficiary.
- Discretionary Trust: A trust that delegates discretion to the trustee to decide when and how to distribute trust assets to the beneficiary. Discretionary Trusts do not set up fixed distributions, but provide general guidelines for the trustee.
- Dynasty Trust: A generation-skipping trust designed to minimize taxation of great family wealth as it is passed on to subsequent generations. Well-defined distributions to each generation allow for bypass of estate taxes and Dynasty Trusts are inaccessible to creditors.
- Implied Trust: A trust imposed by a court as an equitable remedy, usually to return property that was unlawfully obtained (Constructive Trust) or erroneously transferred (Resulting Trust) back to the settlor.
- Irrevocable Trust: A trust that cannot be altered or terminated by the settlor once created. In most states, trusts are presumed irrevocable unless otherwise stated.
- Land Trust: A land-ownership arrangement where the trustee holds title to the land and the beneficiary has the power to direct the trustee, manage the property, and draw income from the trust.
- Living (or Inter Vivos) Trust: A trust that is created and takes effect during the settlor’s lifetime. Often these trusts are designed to be "revocable," so that the settlor maintains the ability to remove property from the trust during his lifetime.
- Pooled Trust: A trust arrangement where multiple beneficiaries "pool" together their trust resources into an umbrella trust account for investment purposes. Each beneficiary maintains access to their own funds through a "sub-account." Pooled Trusts are generally established and maintained by non-profit organizations.
- Secret (and Semi-Secret) Trust: An oral agreement between the settlor and trustee that the settlor will leave a gift to the trustee via will that is to be used for the benefit of a third-party beneficiary. On the face of the will the gift appears absolute – the trust is not mentioned at all in the will documents. (A semi-secret trust mentions the trust in the will, but does not name a beneficiary or is unclear regarding specific terms of the trust.)
- Special Needs (or Supplemental Needs) Trust: A trust established to provide supplemental income for a disabled person who is receiving or may eligible to receive government benefits. Ordinarily an inheritance or receipt of a gift could reduce or eliminate a person's eligibility for government benefits. Special Needs Trusts work around this issue by expressly prohibiting distributions for food, shelter, or clothing.
- Spendthrift Trust: A trust that prevents the beneficiary from selling or pledging away his interests in the trust. Spendthrift Trusts are beyond the reach of the beneficiaries creditors, until such time as the trust property is distributed and placed in the hands of the beneficiary.
- Testamentary Trust: A trust that is included under the terms and conditions established in a will and takes effect when the settlor dies.
- Totten Trust: A revocable trust created by depositing money into an account at a financial institution in the settlor’s name as trustee for another. Totten Trusts were an early form of modern-day "Pay on Death Accounts."
Do I Need an Attorney to Create a Trust?
Trusts can be structured to handle a variety of situations, but careful drafting is essential to make the plan work. If you choose to create a trust, consult with an estate attorney experienced in estate planning. The potential tax implications and legal formalities of trust drafting make a lawyer's counsel indispensable. A lawyer can explain all your options and help you understand what type of trust is right for you and your family.
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Last Modified: 09-15-2014 04:30 PM PDT
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