What are the Different Types of Trusts?

Studies show that trusts are one of the most commonly used estate planning documents with a proven track record.

Regardless of wealth, age, or amount of assets, you should have an estate plan created to ensure your last wishes are met. And your estate plan should include having some type of trust to not only avoid probate, but also protect you and your family from unexpected taxes, family arguments, and more.

Do you know the most common types of trusts? In this article we give a brief overview of them and explain a few advantages of having a trust in place.

What is a Trust?

When you create a trust, you allow someone (a trustee) the right to hold the title to your assets and/or estate for the beneficiaries that you named in your will. Trusts are put into place to ensure your last wishes are met as you intended. Plus, they save time, paperwork, and often help avoid estate taxes.

What is the purpose of a trust?

Trusts can be used for many purposes. However, people usually create them so that they have a legal document stating that the trustee agrees to accept, manage, and protect assets delivered by the trustor.

Many people create revocable living trusts to hold assets while they're alive. These trusts then become irrevocable upon their death. The purpose for doing this is to avoid the time and expense of probate, as well as to provide instructions for the management of their assets in the event they become incapacitated.

Advantages of Trusts for Estate Planning

When it comes to estate planning, creating a will is standard so that your assets are distributed as you wish after you pass away. Unlike wills, trusts offer unique benefits to you and your family, such as:

Pass on assets without going through probate – Assets in a trust typically do not have to go through probate in order to be verified and distributed.

Privacy – Trusts allow you to keep your financial matters out of the public view and keep everything as private as possible.

Responsibly provide to heirs – An heir and beneficiary are not the same thing. An heir is a relative who is legally entitled to an inheritance from a deceased relative's estate when the decedent did not have a legal last will and testament. A trust ensures your assets go to whom you properly intend.

Creates a plan for managing assets – Rather than everything, and everyone, being in chaos, a trust allows a trustee to legally manage and distribute all of your assets.

Establish rules for beneficiaries to receive their assets – One of the roles of the trustee’s is to manage assets in the best interests of the beneficiaries, with regards to any last wishes or instructions. This means requiring certain milestones to be met, self-improvement, or payments in certain amounts.

Reduce taxes - A revocable trust may lead to tax advantages, depending on the terms. However, an irrevocable trust does have tax benefits because you have transferred assets out of your estate.

Help during disability or illness (not just death) – If you set up a revocable trust during your lifetime, your trustee can make decisions and distributions on your behalf. This means if you’re unable to manage your assets due to an illness or accident, they can legally pay bills, file tax returns, and manage assets.

Flexibility – A revocable trust also allows you to change the terms of your agreement at any time. While this does not protect you against creditors and lawsuits, it does allow for flexibility as life changes.

Different Types of Trusts

There are several different types of trusts that you can choose from to protect your estate.

Revocable Trusts

Revocable trusts can be modified or revoked entirely throughout the lifetime of the trustor (you). This type of trust is very helpful in avoiding probate.

Irrevocable Trusts

Irrevocable trusts cannot be changed once they’re set and filed. Once a property is transferred to an irrevocable trust, no one, including the trustor, can take the property out of the trust.

Living Trust

A living trust allows you to hold your assets during life and then a trustee distributes them to the people of your choosing upon death.

Testamentary Trust

You’ll find a Testamentary Trust in a last will and statement. The purpose is to provide for distribution of all (or part) of your estate, including proceeds from life insurance policies.

Charitable Trusts

Charitable trusts benefit a charity named by the trustor during estate planning. These are typically free of estate and gift taxes.

Life Insurance Trusts

A life insurance trust is a trust that owns the eventual proceeds of your life insurance policy. Once this trust is created, you’re no longer the legal owner of the insurance policy—the trust is.

Marital Trusts

A marital trust is an irrevocable trust that allows you to transfer assets to a surviving spouse tax free.

Special Needs Trusts

When a Special Needs Trust is established, you’re allowing the beneficiary to obtain your gifts without taking away their eligibility for government benefits.

Do You Need a Trust?

The million-dollar question is always, “Do I need a trust?”

And, of course, the answer is it depends. It depends a lot on your personal and financial situation. However, if you have any wishes that you want carried out in the event of your death or disability, or estate that you want to be distributed, then yes, you need some type of trust.

A trust allows you to control how your assets are managed during your lifetime and can specify certain conditions before distribution of assets.

Revocable living trusts are often the most flexible option for many individuals. With this type of trust, you give up nothing while gaining the assurance that your wishes will be carried out if something happens to you.

However, if you have a substantial amount of wealth and assets, you will probably need more protection from an irrevocable trust.

An estate planning attorney can help clients think through things like the different types of trust and which is the best option for them. They can also find a trust that supports the goals of your estate plan. It’s not about discussing an account strategy, but rather finding someone who truly understands your needs and getting help with the best path forward that will benefit you and your family.