“Fundamental Estate Planning Types of Trusts”
The following trusts types are used in a typical estate planning case and for which more complicated or exotic trusts are based.
1) Revocable Living Trust or Inter Vivos Trust. The inter vivos trust, also called a revocable living trust, is often established to avoid the probate process, and make sure that assets go to the trust grantor (creator) intended recipients without a lengthy court process after the grantor’s death. Typically, the revocable living trust is the “mothership” containing many subtrusts.
2) Grantor Trust. The Grantor Trust is the individual who has initiated the trust in order to transfer property to another person or business entity for purposes of avoiding probate, taxes, or other complications stemming from the disposal of assets.
3) Irrevocable Living Trust. These trusts are contracts created to transfer or manage assets of an individual that the trust creator claims is not competent to manage property or other assets. The irrevocable aspect can be limited to a portion of the trust – so other parts of the trust could be changed. So, depending on the terms of these trusts, these types of trusts cannot be changed or reversed.
4) Testamentary Trust. The testamentary trust is created through explicit instructions in the will of a deceased individual. This type of irrevocable trust is used to leave assets to a beneficiary but only at a specified time, and take effect upon the grantor’s death. This trust does not avoid probate – it actually needs probate to take effect.
5) Minor’s Trust. The Minor’s Trust passes assets to a child and provides for management of those assets until the child reaches a certain age that the trust creator specifies, when he or she assumes full control of the assets. This trust avoids expensive guardianship proceedings needed to manage the assets the child inherits before he or she turns 18 years old. This arrangement holds all assets in the trust secure for the minor child, since the grantor receives no income from the trust’s assets.
6) Beneficiary’s Trust or Separate Share Trust or Spendthrift Trust. These trusts allow trustees to manage the assets in a trust for the welfare of the recipient of the trust. Separate Share Trusts allow parents to establish a trust with separate features to accommodate the unique needs of each child, while a Spendthrift Trust, or a trust with a spendthrift clause, protects the trust’s assets from being claimed by creditors and allows the assets to be managed by an independent trustee.
7) Blind Trust. Blind trusts allow the trustees or anyone who is holding power of attorney to handle the assets of the trust without the knowledge of the beneficiaries. These trusts can be useful in situations where the beneficiary should be kept unaware of the contents of the trust to avoid conflicts of interest.
(8) Discretionary Trust. In discretionary trusts the beneficiaries and assets are not fixed, but determined by criteria established in a trust instrument and administered at the discretion of the trustees, who decide which beneficiaries, and which assets from the trust, will be involved.
Elder Care Planning Trusts
These trusts are used to protect assets from expensive long term care costs.
9) Third Party Special Needs Trust (Supplemental Needs Trust). The Third Party Special Needs Trust benefits individuals with special needs and is intended to hold assets given or bequeathed to such an individual from a third party, such as parents or other family members, and provides for the person’s care and comfort after using up government benefits. Without this trust, special needs individuals that receive financially based government benefits may lose those benefits.
10) First Party Special Needs Trust (Supplemental Needs Trust). Established by a family member, guardian or the court, this trust helps to preserve financial security for individuals with special needs by allowing an individual to benefit from supplemental resources while keeping eligibility for public aid like SSI and Medicaid.
11) Medicaid Trust (Income Only Trust). This trust helps seniors avoid tax issues and probate problems when a spouse living in a nursing home dies. This trust protects assets when an individual has too many resources to be eligible for Medicaid.
12) Qualified Income Trust (Miller Trust or QIT). The Qualified Income Trust protects assets when an individual applying for Medicaid has income in excess of the amount needed for Medicaid eligibility. The QIT is an irrevocable trust that creates eligibility for long term nursing home care through Medicaid.
13) VA Eligibility Trust. The VA Eligibility Trust protects assets outside the assets limits for long term assisted living, in-home, or nursing care and ensures eligibility for that care if needed.
14) Spousal Testamentary Special Needs Trust. This trust protects assets for the surviving spouse from being counted by Medicaid. It is embedded into a will as a testamentary trust and becomes active upon the death of the grantor, so that the surviving spouse is not considered to be the actual owner of the assets named in the Trust.
15) Pooled Trust. Designed to help disabled people qualify for Medicaid, a pooled trust is run by a nonprofit organization and allows individuals to deposit excess assets (over the Medicare eligibility limits) into the trust, which pays the disabled person’s additional bills and allows them to qualify for Medicaid for nursing home benefits.
Estate Tax Planning Trusts
The following trusts are used typically to avoid or reduce income and estate taxes.
16) Intentionally Defective Grantor Trust. A trust created to freeze some of an individual’s assets for estate tax purposes, the intentionally defective trust is established as a grantor trust with a flaw intentionally built in to ensure that the individual must continue to pay income taxes, which reduces the value of the grantor’s estate and allows beneficiaries such as children or grandchildren to receive the full value of the assets.
17) Credit Shelter Trust. The Credit Shelter Trust allows a married person to avoid estate taxes by allowing the assets specified in the trust agreement to be transferred to the beneficiaries, usually the investor’s children. This trust allows each spouse to maximize their personal estate tax exemption.
18) Marital Trust. A Marital Trust creates a trust to benefit a surviving spouse and the heirs of the couple. Assets are moved into the trust when the first spouse dies, and the income generated by the assets are transferred to the surviving spouse. When that individual dies, the remaining assets go to the couple’s heirs.
19) QTIP Trust. A Qualified Terminable Interest Property Trust provides for a surviving spouse, but this trust also allows the grantor to retain control of the distribution of the trust’s assets after the death of the surviving spouse. Useful for second marriage families and for families wanting to protect assets from predatory marriages.
20) Qualified Personal Residence Trust. This trust transfers the grantor’s residence out of the estate, removing it from the value of the grantor’s estate as a gift. Under the terms of the trust, the grantor can continue to live in the residence for a number of years rent free, before the beneficiaries of the trust are vested in their interests.
21) Generation Skipping Trust. This trust places assets in a trust designed to transfer them to a grantor’s grandchildren, rather than children, in order to avoid estate taxes that occur if the deceased’s children directly inherit the assets.
22) Grantor Retained Annuity Trust (GRAT). This trust allows an individual to make large financial gifts to family members while avoiding the gift tax. The trust is set up as an annuity, allowing the donor to make a donation and receive an annual payment from the annuity for a fixed term At the end of the term, remaining assets in the trust go to the beneficiary as a gift.
23) Charitable Remainder Annuity Trust (CRAT). This trust allows a donor to place a large gift of assets such as cash or property into a trust that pays back a fixed amount each year. Upon the donor’s death, the remaining assets are transferred to the designated charity.
24) Charitable Lead Annuity Trust (CLAT). This irrevocable trust provides an income interest to a charitable organization, while passing assets to other beneficiaries. Part of this interest goes to another beneficiary, such as the donor, their family members or other individuals.
25) Charitable Remainder Unitrust (CRUT). This irrevocable trust was created under the authority of the Internal Revenue Service and distributes a fixed percentage of its assets to a beneficiary, and, at the end of a fixed term, the remainder of the assets are transferred to a designated charitable organization.
26) Charitable Lead Unitrust (CLUT). This trust allows a donor to give a variable amount annually from the trust to charity for a fixed term of the life of an individual. When the term of the trust is over, remaining assets are distributed back to the donor or other designated recipient.
27) Sharkfin Charitable Lead Annuity Trust. The “Sharkfin” trust allows for small payments to be made into a charitable lead annuity trust for the first few years of the trust term, but a very large payment must be made into the trust in the last year or two.
28) Irrevocable Life Insurance Trust (ILIT). This trust helps to preserve proceeds from life insurance from taxation, and allows the Trust to invest a deceased person’s life insurance benefit and administer the trust for a surviving spouse and children.
29) Buildup Equity Retirement Trust. In this trust, a spouse (the donor) makes gifts to the other spouse (the donee) using an annual gifting exemption instead of an unlimited marital deduction. In this way the assets are exempt from both gift and estate taxes.
30) Grantor Retained Unitrust (GRUT). This type of irrevocable trust allows the grantor to put assets into the trust and receive a variable amount of income from an annuity during the term of the trust, which can be fixed or for the life of the grantor.
31) Grantor Retained Income Trust (GRIT). This type of trust allows the grantor to place assets in the trust for a beneficiary, but still retain the right to receive income from these assets for a certain period of time, after which the beneficiary starts to receive income.
Asset Protection Trusts and Other Miscellaneous Types of Trusts
32) Domestic Asset Protection Trust. The DAPT is created in states that have anti-creditor trust acts (Alaska, Delaware, South Dakota, Nevada and some others), and allows an individual to establish a trust for his or her own assets that offers protection from creditors.
33) Offshore Asset Protection Trust. Considered the strongest asset protection strategy available, this trust is established in a non-domestic jurisdiction and allow assets to be conveyed to the offshore trusts for protection from seizure in judgments for creditors.
34) Totten Trust. This trust allows an individual to put money into a bank account or other form of security to be held until death, when the contents of the account will pass to a designated beneficiary without having to deal with probate. This is also known as a pay on death designation.
35) Land Trust or Illinois Land Trust. Also known as Illinois-type land trusts, these trusts appoint a trustee to maintain ownership and management of a piece of real property for the benefit of a beneficiary. These trusts may also be held by nonprofit entities for conservation purposes, or by corporations to accumulate large amounts of land.
36) Gun Trust. The NFA Gun Trust allows the maker to acquire Class 3 weapons and other destructive devices. This trust allows for the transfer of property to and from the trust, and for the modification of trustees and beneficiaries.
37) IRA Trust. To preserve assets from taxation, an individual can establish a trust as the beneficiary of an IRA account, which protects the beneficiaries, such as young children or adult children with special needs.
The wide range of trust instruments available allows individuals in a variety of financial circumstances to protect assets and ensure the security of family members. One size does not fit all. These types of trusts offer estate planning options for diverse needs and circumstances.