Choosing the correct type of trust for your estate plan can ensure you have the optimal structure to pass your wealth to your loved ones smoothly. While a will is an essential part of the estate planning process, a trust can allow for more complex planning, avoiding family conflicts, tax burdens and painful probate costs and delays.
In this guide to different types of trusts in estate planning, we’ll explain your possible options in easy-to-understand English. You should always consult a reputable estate planning attorney before making any decisions.
What Is a Trust?
A trust is a legal document that sees a trustor (the trust creator) give another party (the trustee) the right to hold property or assets for the benefit of another person or persons. This is called a fiduciary relationship.
Trusts allow trustors and their attorneys to control how assets are transferred to beneficiaries. This is completed by including terms and rules in the trust documents.
- Help avoid taxes and probate.
- Control how money and assets are distributed, either while the trustor is alive, disabled or has passed away.
- Allow for more complex and detailed rules regarding distribution, such as sharing assets upon the completion of milestones.
Common Types of Trusts
Here are the most frequently used types of trusts in the U.S.:
Revocable Living Trusts
Living Trusts (also referred to as a ‘Revocable Trust’) are types of trusts that can be changed at any time.
The designated trustee gains full responsibility to manage the trust’s assets in the best interests of the named beneficiaries. When the grantor passes away, the trust can no longer be changed and becomes an ‘Irrevocable Trust’.
Living trusts are considered beneficial as they make assets easy to transfer, compared to the stressful and slow probate process.
Living trusts are in effect even when the grantor is alive and does not have to clear courts when the grantor passes away.
Benefits of a Revocable Trust:
- Grantors can include desired healthcare and end-of-life provisions.
- Protects grantors’ wishes in the event of incapacity.
- Can bypass probate delays and costs.
- A simple succession of trustees.
- Beneficiaries can have immediate access to income and assets.
- Trust documents are private.
Negatives of a Living Trust:
- In Florida, primary residences may lose their ‘homestead creditor’ exemption if placed in a trust.
- Living trusts do not protect from creditors, as the grantor is still considered the true owner of the assets (as the document is revocable).
- Income earned by the trust is taxable to the grantor’s personal tax return.
Irrevocable Living Trusts
Similarly, there are also Irrevocable Living Trusts. As the name suggests, this trust sees the grantor lose the right to change the trust once it is created. The trustee becomes the legal owner, but the individual can still reduce their taxable estate. Irrevocable trust creators cannot take back ownership of the trust assets.
Testamentary Trusts (or, ‘Trust Under Will’) is a type of trust created via a will after the grantor passes away. Testamentary trusts can contain a portion or all of the grantor’s assets, as defined in their last will and testament.
Testamentary trusts do not establish until after the grantor’s death.
- Preserve assets for children from previous marriages.
- Protect the financial future of a spouse.
- Ensure beneficiaries with special needs get support.
- Allow for easy gifting to charities.
Irrevocable Life Insurance Trust
Irrevocable Life Insurance Trusts (ILIT) are commonly used in wealthy families’ estate plans.
ILITs are usually created to own and control a life insurance policy while the insured person is still alive. By creating an ILIT, you can ensure that your life insurance proceeds are managed and distributed as desired after your death. Grantors must live for three years from the date of the policy transfer.
ILITs can include individual and second-to-die life insurance policies. ILITs can be very useful if you are concerned about the Federal Government’s estate tax – which currently allows for an $11.7 million exemption.
Anyone considering tax planning in their estate plan should always consult an estate planning attorney.
Note: The Secure Act of 2019 requires that non-spousal IRA beneficiaries must withdraw all IRA or 401(k) funds within ten years of the death of the original account holder.
Charitable Lead Trust
Charitable Lead Trusts are types of trusts that can reduce the potential tax liability for beneficiaries.
Charitable lead trusts can allow you to donate to charity via the trust for a pre-set period of time. Once the time has expired, the remaining balance will be paid to the named beneficiaries.
Many people use this type of trust to reduce the tax burden on the beneficiary. It can also open up tax benefits such as tax deductions for charity donations.
Alternatively, it can be a good way of making charitable contributions without much input or a way to structure your estate’s distribution if a charity is a priority.
Charitable Remainder Trusts
Charitable remainder trusts (CRT) are useful for those holding appreciated assets on a low basis. For example, real estate or stocks.
In short, a CRT pays a percentage of the value of the assets you contribute to the trust annually. Every year, the value of those assets is recalculated with the income paid out from the assets.
Dynasty Trusts are long-term trusts that enable wealth to be shared amongst generations, without transfer taxes. If properly designed, dynasty trusts can last for many generations or even forever.
Currently, you can put up to $11.58 million in a dynasty trust. They are irrevocable trusts that cannot be changed once funded.
Special Needs Trust
Special Needs Trusts allow people with special needs (such as physical or mental illness or disability) to gain access to funding without the risk of losing their eligibility for public assistance program benefits.
This works because special needs benefits are determined by income and asset restrictions. These types of trusts can be beneficial for anyone looking for extra reassurance for their child or loved one.
A Pet Trust is a type of trust that is designed solely for a pet. Should you die or become severely disabled, a pet trust can ensure your pet has designated finances, care and support.
No human beneficiary is required. Instead, a trustee takes control of the trust to ensure the money is spent in the best interests of your pet.
Qualified Domestic Trust
A Qualified Domestic Trust is a unique trust for those with non-US citizen spouses. It allows the non-citizen spouse to benefit from marital deduction.
Grantor Retained Annuity Trust
Grantor retained annuity trusts (GRAT) secure assets in a trust which generates annual income. Once the trust has reached expiry, the named beneficiaries receive the assets while avoiding gift tax liability.
Generation-Skipping Trusts (GST) are a type of trust where grandchildren inherit the assets. This avoids estate taxes that would apply if the children directly inherited the assets.
Qualified Personal Residence Trust
A qualified personal residence trust (QPRT) allows the grantor to remove their personal home from their estate, to reduce the impact of gift taxes when transferring assets to a beneficiary.
Contact an Estate Planning Attorney for Trusts Today
If you’re interested in creating a trust to help protect your family’s wealth, minimize taxes or avoid the probate process, then our Florida estate planning attorneys can help.
Battaglia, Ross, Dicus & McQuaid, P.A. is U.S. News and World Reports Tier 1 law firm in Florida, specializing in Estate Planning & Probate since 1958. With award-winning experienced estate planning attorneys, they can help you create a trust to avoid complications for your family after your death.