Types of Trusts

Many trusts are not that scary - they serve as a way to save money on taxes in many cases.

Many trusts are not that scary - they serve as a way to save money on taxes in many cases.

Are you working on an estate plan or a will? You might have wondered about using a trust, but the types of trusts may seem confusing. Additionally, a trust involves at least three people – the grantor (the trust creator who also is known as the settlor or donor), the trustee (the person who holds and manages the property for the benefit of the grantor and others) and the beneficiary or beneficiaries, depending upon the type of trust you use.

The property within a trust can consists of real or personal property such as money, real estate, stocks, bonds, collections, business interests, personal possessions and automobiles. Putting this property in trust transfers it from the grantor’s personal ownership to the trustee, who holds the property for the grantor. The trustee, then, has legal title to the trust property and the law looks at these assets as if the trustee owned them even though trustees are not full owners of the property.

Trustees have legal duty to use the property as defined in the trust agreement and permitted by law. The beneficiaries then retain what is known as equitable or beneficial title, which is the right to benefit from the property as defined in the trust. But, you, as the donor, may retain control of the property and, in certain trusts, you retain the rights of ownership as if the property still was in your name.

You can make a revocable trust, or a trust that can be changed or terminated at any time by the donor. Or, you can make an irrevocable trust, or a trust that cannot be changed or terminated before the time specified in the trust. Other specific trusts include:

  • Charitable Trusts: Created to support a charitable cause with annual gifts.
  • Discretionary Trusts: Allows the trustee to distribute income and principal among beneficiaries.
  • Dynasty Trusts: This type of trust can last for generations to help people with great fortunes control the distribution of wealth over a long period of time.
  • Generation-skipping Trusts: This is a tax-saving move that benefits several generations of descendants.
  • Insurance Trusts: Another tax-saving trust where assets are used to buy a life insurance policy. The proceeds benefit the settlor’s beneficiaries.
  • Living Trusts: Put your assets into a trust and wear all hats – donor, trustee and beneficiary – or be the donor and choose a trustee and beneficiaries.
  • Special Needs Trusts: Established for people with disabilities and who want to keep their government benefits.
  • Spendthrift Trusts: A trust established for a person who the grantor believes is a spendthrift! This type of trust also can be used for a beneficiary who needs protection from creditors.
  • Split-interest Trusts: This type of trust makes it possible for either a charity or an individual to have an interest in the trusts for a period of time.
  • Support trusts: The trustee can spend only as much income and principal as may be needed for the education and support of beneficiaries.
  • Testamentary Trusts: Trusts set up in wills.
  • Totten Trusts: This is not really a trust. It is a bank account(s) that pass to beneficiaries immediately upon your death.

If you decide you’d like some tax-saving benefits that trusts do provide, talk with an attorney to learn which type of trust might be best for you, your beneficiaries and your lifestyle. Make sure that attorney is willing to work with you to tailor the trust to fit your needs, otherwise the flexibility benefit of trusts becomes moot. Finally, make sure you choose a lawyer who is familiar with estate planning, trusts and tax laws.

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