Are There Different Types of Trusts That Can Be Used in Estate Planning?
Did you know that there are different types of trusts? This may come as a surprise to those new to the area of estate planning, but it may be important to be familiar with the basic types of trusts. We will discuss some of the basics about trusts and the different types of trusts in the following paragraphs.
Let us begin with the parties involved in a trust. The person who creates the trust is called the trustor, grantor, settler, or creator. The person who receives distributions from the trust is called the beneficiary. The trustee is the fiduciary who manages the trust property. A single person can serve in more than one role at a time. In a living trust, a person may be the trustor, trustee, and beneficiary simultaneously. In the alternative, more than one person can have the same role, as in co-trustees or co-beneficiaries.
A living or inter vivos trust is created while the trustor is alive. A testamentary trust is created following the trustor’s death, via his or her will. Trustees have discretionary or non-discretionary authority in distribution. A beneficiary can receive income or dividends from money earned by the trust or may be a remainder beneficiary, who receives what is left after the primary beneficiary passes away. A trust is a legal document, but the trust is not deemed created, until the property has been transferred into the trust.
The four most common types of trusts include revocable, irrevocable, special needs, and spendthrift trusts.
- A revocable trust is commonly used by married couples. It can even serve in place of a will. It has the benefit of the ability to change or revoke and to avoid probate following the trustor’s passing.
- An irrevocable trust cannot be modified or revoked. It has many benefits, including tax benefits, protection of assets from creditors, and utilization in long-term care planning to exclude a person’s assets from his or her eligibility determination for Medicaid.
- A special needs trust is created to provide for an individual who needs assistance for life, often a child of the trustor. The key to a special needs trust may be its language, which ensures the beneficiary can receive financial support from the trust without being disqualified from government programs for those with special needs.
- A spendthrift trust is a living or testamentary irrevocable trust. The key provision limits the beneficiary’s access to the trust principal. The beneficiary and the beneficiary’s creditors cannot force distributions. The spendthrift provision is often used when the trustor wants the beneficiary’s spending monitored, such as in the case of a person with a substance abuse disorder.
Armed with the knowledge of the different types of trusts used in estate planning, it is a great time to meet with a qualified estate planning attorney to discuss the right trust for you. Please reach out to our office to schedule an appointment.