A trust is a valuable estate planning legal instrument used to avoid probate while benefiting a specific beneficiary or group of beneficiaries. Although the requirements for forming a trust vary by state, the following criteria are typically necessary:
- Settlor Capacity: To create a valid trust, the settlor must have the proper mental capacity to create the trust
- Identifiable Property: Trust property, also known as “trust res,” must be specifically identifiable, meaning that there must be a sufficient enough description to know what property is to be held;
- Identifiable Beneficiary: Typically, the beneficiary or group of beneficiaries must be sufficiently identifiable, meaning that they must be determined when the trust is formed. However, in the case of a charitable trust, this is often not a requirement; and
- Proper Trust Purpose: The trust being formed must be proper, meaning that it cannot be created for an illegal reason. For instance, a person cannot create a spendthrift trust and hold the property in their name for their benefit simply to avoid creditors from reaching their assets. Courts will typically hold that such trusts are invalid.
Generally, all trusts in the United States are presumed to be irrevocable unless the trust instrument otherwise states that the trust is revocable. However, this is not true in Texas, Oklahoma, or California, where trusts are generally presumed to be revocable unless specified as irrevocable.
What Are Some Common Types of Trusts?
The typical reason for creating a trust is to hold some sort of property in the trust for the benefit of another person or party.
The following is a list of the most common trusts that may be created:
- Inter Vivos or Living Trust: One of the most commonly created trusts is an inter vivos trust, which is created while the settlor is still alive. An inter vivos trust is often designed to be revocable so that the settlor can add or remove property freely during their lifetime;
- Testamentary Trust: A testamentary trust is another common trust created through a will and usually becomes effective upon the death of the trust creator;
- Charitable Trust: Charitable trusts are created to transfer and designate a person’s assets or property to a charitable organization. The requirements for creating a charitable trust are generally more relaxed than the requirements for other trusts, as they are often seen as being a benefit to the public;
- Discretionary Trust: A discretionary trust is a trust that allows the trustee (i.e., the person who manages the trust property) to decide when and how the trust assets and property should be distributed to the named beneficiaries;
- Special Needs Trust: Special needs trusts are created to provide additional income for a person with disabilities but still allow the person to receive government benefits. In short, special needs trust help work around the issue of a gift or inheritance being included in the calculation of the person’s income for benefits;
- Spendthrift Trust: A spendthrift trust is a trust that is created to provide for the needs of another person while also preventing the beneficiary from accessing the trust property. Spendthrift trusts also protect a beneficiary from themselves by shielding them from their debts or creditors; or
- Land Trust: Land trusts allow a trustee to hold title to a certain piece of land or property, giving the trustee the power to manage the property and make income distributions from the property.
The following is a list of other less common trusts that may be created:
- Asset Protection Trusts;
- Bypass (or AB) Trusts;
- Clifford (or Short-Term) Trusts;
- Crummey Trusts;
- Implied Trusts;
- Pooled Trusts;
- Secret (and Semi-Secret) Trusts; or
- Totten Trusts (Payable on Death Accounts).
A trust may also contain characteristics of multiple trusts. It is not uncommon for a trust to be an irrevocable, express, inter vivos, discretionary, or spendthrift trust. Before creating a trust, it is important to think carefully about the purpose of creating the trust, as one or multiple trusts may be the best solution for your particular needs.
What is a Revocable Trust?
Revocable trusts are created during the lifetime of the trustmaker. Revocable trusts can be altered, changed, modified, or revoked entirely. Often called living trust, revocable trusts are trusts in which the trustmaker:
- Transfers the title of a property to a trust
- Serves as the initial trustee
- Has the ability to remove the property from the trust during their lifetime
Revocable trusts help avoid probate. If the ownership of assets is transferred to a revocable trust during the lifetime of the trustmaker so that the trust owns it at the time of the trustmaker’s death, the assets will not be subject to probate.
A revocable trust is not an asset protection technique. Assets transferred to the trust during the trustmaker’s lifetime will remain available to the trustmaker’s creditors. The creditor must petition a court for an order to get to the assets held in the trust. Typically, a revocable trust evolves into an irrevocable trust upon the death of the trustmaker.
What is a Revocable Trust?
An irrevocable trust cannot be altered, changed, modified, or revoked after its creation. Once a property is transferred to an irrevocable trust, no one can take the property out of the trust. It is possible to purchase survivorship life insurance, of which an irrevocable trust can hold the benefits.
Survivorship life insurance can be used for estate tax planning purposes in large estates. However, if it is held in an irrevocable trust, it can have negative consequences.
What Are Asset Protection Trusts?
An asset protection trust is designed to protect a person’s assets from claims of future creditors. Asset protection trusts are often set up in countries outside of the United States, although the assets do not always need to be transferred to a foreign jurisdiction. The purpose of an asset protection trust is to protect assets from creditors.
Asset protection trusts are normally structured to be irrevocable for a term of years, ensuring the trustmaker is not a current beneficiary. An asset protection trust is normally structured so that the undistributed assets of the trust are returned to the trustmaker upon the termination of the trust, provided there is no current risk of creditor attack. This permits the trustmaker to regain control over the formerly protected assets.
What Are Charitable Trusts?
Charitable trusts benefit a charity. Charitable trusts may be established as part of an estate plan to avoid the estate and gift tax. Charitable trusts funded during a grantor’s lifetime can provide trustmakers with financial benefits.
Should I Hire an Attorney for Help with a Trust?
Many different types of trusts may be formed depending on your situation. Creating a valid trust is often very complicated. If you consider creating a trust instrument to benefit another party, consulting with a licensed and knowledgeable trust attorney in your area is in your best interests.
An experienced estate attorney will be able to help you select the best type of trust for your particular needs, as well as help you create the instrument itself. Having the assistance of a qualified attorney will ensure that the trust is legally binding and properly drafted.
Use LegalMatch to find the right trust attorney in your area today.