Understanding The Different Types Of Trusts

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In business and legal terminology, trusts are defined as the legal entity created by a trustor through which a trustee holds the right to manage the trustor’s assets or properties for the benefit of a beneficiary. In simpler words, trust is a financial agreement between three parties that sets management rules for various assets. Of course, these definitions are not bulletproof and they can be very varied, depending on the type of trust. The best estate planning strategies often use multiple types of trusts.

There are a lot of different trusts, but the main idea remains the same. Every trust is an agreement between three separate entities and it is designed to enforce a management plan for the assets involved. The property is managed according to the provisions defined in the trust. These financial tools are very effective when it comes to family estate planning.

The parties involved in a trust

As described above, every trust has three separate entities – the trustor, the trustee and the beneficiary. Let’s try to learn more about these three entities and what they mean:

The trustor – this is the party that creates the trust; the trustor is the person or organization that grants the trustee control over the assets, properties or estate; the trustor creates the agreement and the provisions of the trust;

The trustee – this is the party that is responsible for managing the trust; the trustee is appointed by the trustor and the roles are described in the trust’s agreement; the trustee is in charge of managing all assets, according to the agreement;

The beneficiary – this is the party that will receive the benefits of the trust, according to the agreement; the trustee hands the properties or assets to the beneficiary, according to the agreement created by the trustor;

The most common types of trusts

As previously mentioned, there are a lot of different types of trusts. They all have very similar structures, but some of them are specifically designed for different purposes. There are five main types of trusts that are often part of estate planning strategies: living, revocable, irrevocable, testamentary and funded or unfunded trusts. Keep in mind that there are even more types of hyper-specialized trusts.

Let’s focus on the most important ones for family estate planning:

Living trusts

Living trusts are also known as inter-vivos trusts. They are made by the trustor (also known as the grantor) during his or her lifetime. In this type of trust, the assets can be used by the individual, during his or her lifetime. After the grantor passes, the assets are transferred from the trust to the beneficiaries, according to the agreement. Living trusts are ideal tools to use if you want to avoid going through the probate procedure. This makes living trusts an important option as a family estate planning tool.

Testamentary trusts

Usually known as will trusts, testamentary trusts are financial and legal agreements made specifically for the benefit of a beneficiary. The beneficiary receives the assets only after the trustor passes away. The trust includes details on the procedures for property transfer. The testamentary trust is usually created by the grantor, but is instituted by an executor, who also acts as the manager of the trust. This person will manage the trustor’s decedents according to the will created. Keep in mind that a testamentary trust is irrevocable, making it an ideal tool to help you avoid the probate process moving forward.

Revocable trusts

Similar to living trusts, revocable trusts are created during the trustor’s lifetime. As their name imply, revocable trusts can be changed, altered, adapted, revised and terminated. This can be done during the trustor’s lifetime, by the trustors themselves. The main role of a revocable trust is to transfer the assets outside of probate. Many revocable trusts have the same person as the trustor, trustee or beneficiary. This person can create the trust, manage it and can be the sole beneficiary of the trust. If this person dies, the assets will be transferred to a successor trustee, as defined in the trust’s agreement.

Irrevocable trusts

As the name implies, an irrevocable trust is a trust that cannot be changed, altered, revised or terminated during the grantor’s lifetime. In some cases, the trust cannot be revoked even after the grantor’s death. These types of trusts are very effective financial tools – there are very little, to no property taxes at all. This is because assets cannot be moved back into the possession of a trustor, under any circumstances. Irrevocable trusts are extremely popular estate planning strategies because the assets are transferred directly from the grantor to the beneficiary, without any additional steps required.

Funded or unfunded trusts

These types of trusts have funds or assets put into them or not. They can become funded at any point, and then they can be transformed into irrevocable or revocable trusts. They can be continuously refunded by the grantor.

Credit shelter trusts

Also known as a bypass trust or a family trust, a credit shelter trust allows the trustor to grant the beneficiaries a part of the assets up to the estate-tax exemption. These trusts are designed to transfer properties to beneficiaries without paying additional transfer taxes. These trusts are very popular because the clients don’t have to pay taxes on their properties. This aspect remains the same, even if the trust grow in size and the assets are larger.

Insurance trusts

This type of trust allows the trustor to combine the benefits of a trust with the benefits of a life insurance policy. The trust is free from taxation on the estate and other assets. This trust is irrevocable and can’t be altered, changed, revised or revoked. The trustor cannot borrow against the life policy. However, the trust allows the policy to pay for the post-death expenses. This is a major advantage, especially for clients who want to avoid the difficult probate process.

James is a blogger who loves to explore new things. His passion for helping people in all aspects of daily things flows through in the respected industries coverage he provides.

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