A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a trustee, holds legal title to property for another person, called a beneficiary.
Trusts fall into two basic categories: testamentary and inter vivos.
What Is a Testamentary Trust?
A testamentary trust is a trust created by your will. It does not come into effect until you die.
What Is an Inter Vivos Trust?
In contrast, an inter vivos trust starts during your lifetime. In Latin, inter vivos means "between the living. You create an inter vivos trust now, and it exists while you are alive.
There are two kinds of inter vivos trusts: revocable and irrevocable.
Revocable Trusts
Revocable trusts are often referred to as living trusts. With a revocable trust, the person who created the trust, called the grantor or donor, maintains complete control over the trust and may amend, revoke or terminate it at any time. This means that you, the donor, can take back the funds you put in the trust or change the trust’s terms. You can reap the benefits of the trust arrangement while maintaining the ability to change the trust at any time prior to death.
Revocable trusts are generally used for the following purposes:
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Asset management. They permit the named trustee to administer and invest the trust property for the benefit of one or more beneficiaries.
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Probate avoidance. At the death of the trust grantor, the trust property passes to whoever is named in the trust. It does not come under the jurisdiction of the probate court, and its distribution need not be held up by the probate process. However, the property of a revocable trust will be included in the grantor's estate for tax purposes.
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Tax planning. While the assets of a revocable trust will be included in the grantor’s taxable estate, the trust can be drafted so that the assets will not be included in the estates of the beneficiaries, avoiding taxes when the beneficiaries die.
Irrevocable Trusts
An irrevocable trust cannot be changed or amended by the grantor. Any property placed into the trust may only be distributed by the trustee as provided for in the trust document itself.
For instance, the grantor may set up a trust under which they will receive income earned on the trust property, but that bars access to the trust principal. This type of irrevocable trust is a popular tool for Medicaid planning.
Testamentary Trusts
As noted above, a testamentary trust is a trust created by a will. Such a trust has no power or effect until the will of the grantor is probated.
Although a testamentary trust will not avoid the need for probate and will become a public document as it is a part of the will, it can be useful in accomplishing other estate planning goals. For instance, the testamentary trust can be used to reduce estate taxes on the death of a spouse or to provide for the care of a child with disabilities.
Supplemental Needs Trusts
The purpose of a supplemental needs trust is to enable the donor to provide for the continuing care of a disabled spouse, child, relative, or friend. The beneficiary of a well-drafted supplemental needs trust will have access to the trust assets for purposes other than those provided by public benefits programs.
In this way, the beneficiary will not lose eligibility for benefits such as Supplemental Security Income, Medicaid, and low-income housing. A supplemental needs trust can be created by the grantor during life or be part of a will.
Credit Shelter Trusts
Credit shelter trusts are a way for married couples to ensure their surviving spouse can take advantage of state and federal estate tax exemptions.
If you are looking for more information on estate planning and the rules governing the various types of trusts, be sure to connect with a qualified estate planning attorney in your area.
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