If you are considering making a trust a part of your estate plan, it is important to understand what a trust is and the different types of trusts that exist.
What Is a Trust?
A trust is a legal agreement between three parties for the management of trust property. The grantor is the individual who creates the trust and is also known as the settlor or trustor. The trustee is the individual, group of individuals, or trust company that manages the property transferred to the trust. The beneficiary or beneficiaries are the individuals or entities who receive the benefits of the trust.
What Is an Inter Vivos Trust?
An inter vivos trust, or living trust, is one that is created during the grantor’s lifetime.
What Is a Testamentary Trust?
A testamentary trust is created after a decedent’s death by the executor of the decedent’s estate. The terms of the trust are found in the decedent’s will and the trust is supervised by probate court until terminated.
What Is the Difference Between a Revocable Trust and an Irrevocable Trust?
A revocable trust is created by the grantor during the grantor’s lifetime. The grantor usually serves as the trustee and is the initial beneficiary of the trust property during the grantor’s lifetime.
Frequently, a married couple will create a joint revocable trust where they both are the grantors, trustees, and lifetime beneficiaries of the trust property until the last of them dies. During their lifetimes the trust can be amended or revoked and property can be transferred in or out of the trust at any time. All of the trust property remains within the control of the grantors.
An irrevocable trust may be created for a variety of purposes, but most frequently for estate tax and disability planning. The grantors of an irrevocable trust transfer property into an irrevocable trust. For the most part, they cannot then change the terms of the trust or retain total control over the trust property.
Other Types of Trusts
There are many types of trusts created for specialized reasons.
Qualified Terminable Interest Property (QTIP) Trust
A QTIP is generally created when the grantor wants a spouse to benefit from the trust property after his or her death for the spouse's lifetime, but then, upon the spouse's death, wants the trust property to benefit children born of a prior marriage.
Special Needs Trusts (SNT)
An SNT is created by the grantor for a disabled beneficiary. The terms of the SNT enable the beneficiary to maintain eligibility for Medicaid or Social Security Income benefits.
Irrevocable Life Insurance Trusts (ILIT)
The ILIT is created for the sole purpose of holding an insurance policy on the life of the grantor. The trust owns the policy so that the proceeds of the policy are not included in the gross estate of the grantor for estate tax purposes. Frequently, the proceeds are used to help pay any estate tax owed to the IRS following the death of the grantor.
Should a Trust Be a Part of Your Estate Plan?
There are many reasons to include a trust in one’s estate plan. A trust is a useful tool for the management of assets during the life of the grantor, including during time of incapacity, and for transferring trust property to the grantor’s beneficiaries without the supervision of the probate court.
If you are considering creating a trust, consult with an estate planning attorney who can help you understand the types of trusts and decide which trust is right for you and your family.