Understanding The Different Kinds Of Estate Planning Trusts

By Rebecca Lake. May 7th 2016

Part of estate planning involves determining how you want your financial affairs to be managed during your lifetime and after your death. While you can draft a last will and testament to specify how you want your property distributed, a will alone may not be enough to ensure your assets are protected. If you’re married, have minor children or have a sizable estate, a trust can provide you with the additional security you and your loved ones need.

What Is A Trust?

A trust is a legal arrangement that allows you to specify how you want your financial affairs to be managed. A trust can be created in conjunction with or independently of a last will and testament.

There are two basic steps involved in creating a trust. First, you or your attorney must draft a deed of trust or trust agreement which identifies you as the settlor or grantor of the estate. The document must also specify who will serve as trustee. The trustee is responsible for managing any assets or financial holdings that are included in the trust. The trust document must also include the names of your beneficiaries and your specific instructions for managing your assets.

Once the trust is created on paper, you can begin transferring ownership of your assets to the trustee. The type of assets you may put in a trust include bank accounts, real estate, vehicles, antiques, heirlooms, artwork, jewelry, stocks, bonds, mutual funds, certificates of deposit (CDs) and other valuables.

Living Vs. Testamentary Trusts

A living trust, also known as an inter-vivos trust, is a trust that takes effect while you’re still alive. With a living trust, you may act as your own trustee and appoint a successor trustee to assume control when you die. A testamentary trust is a trust that is created through a specific provision you include in your last will and testament. A testamentary trust only takes effect after your death.

Should you become incapacitated, a living trust can ensure that your assets are protected and your family is taken care of. Your successor trustee can take over the management of your financial affairs, pay your bills and make sure that your family has access to the resources they need. This can be particularly helpful if you have substantial assets or you own and operate a business.

Revocable Vs. Irrevocable Trusts

A revocable trust can be changed or revoked at any time prior to your death and for any reasons. For instance, if you want to add or remove assets from the trust or if you want to exclude a specific beneficiary, you can either revise the existing trust or revoke it in its entirety. Once a trust is revoked, you can establish a new one according to your wishes.

An irrevocable living trust cannot be changed once it has been established. This means that once you transfer control of a specific asset into an irrevocable trust, you cannot reassume ownership of it. There are a number of reasons why you may want to establish an irrevocable trust. For example, elderly individuals may choose to permanently transfer their assets in order to qualify for Medicaid funding. An irrevocable trust may also be created as part of a divorce decree.

A living trust may be either revocable or irrevocable, depending on your needs. A testamentary trust is always revocable during the settlor’s lifetime and automatically becomes irrevocable after your death.

Special Purpose Trusts

There are a number of different types of trusts that can be created in order to fulfill a specific purpose. For example, you may consider establishing a charitable trust if you wish to leave some or all of your assets to a specific charity. Charitable trusts must be created with a specific end date at which time the assets held in the trust revert to the settlor’s other beneficiaries.

Other types of special purpose trusts include asset protection trusts which are designed to protect your beneficiaries and your estate from the claims of creditors; credit shelter trusts which allow married couples with large estates to potentially reduce their future tax liability when one spouse dies; life insurance trusts which place the proceeds of your life insurance policy into a trust immediately upon your death; and special needs trusts which allow you to make financial arrangements for the care of children or other relatives with disabilities without affecting their eligibility to receive government benefits.

Benefits Of Trusts

Trusts offer several benefits that wills do not. First, living trusts are not subject to the probate process. Probate is a court-supervised legal proceeding in which your assets are inventoried, your creditors are paid and your estate is distributed to your beneficiaries. Probate can be lengthy and costly and creating a trust allows you to bypass this process. In addition, trusts, unlike wills, do not become a part of the public record which allows your loved ones greater privacy. (To learn more about the probate process, see What You Need To Know About The Probate Process And Rules.)

Second, establishing a trust also allows you to leave instructions for the care of minor children and set restrictions on when and under what conditions they may receive their inheritance. For example, you may wish them to reach a certain age or be married before gaining access to their trust. Finally, establishing a trust can potentially help to reduce the tax liability for your surviving spouse. Depending on the size of your estate, you may be able to save on federal and state estate taxes by placing your assets in a trust. (For more information on estate taxes, see A Guide To Federal Estate Taxes.)

Establishing and maintaining a trust can be costly but the long-term benefits may significantly outweigh the expense. While a trust may not be right for everyone, it’s important to consider all of your options when plotting your financial roadmap.


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