Wills & Trusts

The Different Types of Trust: How They Differ, and What They Mean for Your Estate Plan

Trusts — one of the most common estate planning tools — can have different characteristics, benefits and considerations depending on the type you choose. Here’s what you need to know.
May 8, 2024

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Snug makes it easy to create a Will or Trust in under 20 minutes. Powers of Attorney and Health Care Directives are included for free with any Will or Trust, as is a year of free updates.
Get started for free

Need a Will or Trust?

Snug makes it easy to create a Will or Trust in under 20 minutes. Powers of Attorney and Health Care Directives are included for free with any Will or Trust, as is a year of free updates.
Get started for free

Trusts, which come in many forms, can offer an effective tool for estate planning, but they can be complex.

In this blog post, we will delve into the characteristics, benefits, and considerations of different types of trusts.‍

What are trusts?

Trusts are legal arrangements allowing a trustee (or trustees) to hold assets on behalf of beneficiaries.

Different types of trusts serve varied purposes - some are created to support dependents, some are established for tax planning, while others are aimed at protecting assets from creditors. 

Trusts can be particularly helpful in complex family situations, such as those involving children from previous marriages, or when the grantor wants to maintain control over the asset distribution.

Advantages and Disadvantages of trusts

Advantages:

  • Unlike the assets that are distributed via a will, assets placed in a trust don’t have to go through probate.
  • Provide financial support for the beneficiaries while ensuring that the remaining assets ultimately pass to the grantor's chosen beneficiaries.
  • May minimize estate taxes depending on the type of trust.
  • Offer flexibility with the ability to amend or terminate the trust during the grantor's lifetime (in the case of revocable trusts).
  • Can protect trust assets from potential creditors.
  • Prevent assets from being distributed to unintended beneficiaries.

Disadvantages:

  • Trusts can be expensive (and admin-heavy) to set up.
  • Trusts need ongoing management.
  • Some types of trusts may subject the assets to estate taxes upon the death of the surviving spouse/beneficiary.
  • Depending on the trust, the beneficiaries may have limited control over the trust assets.
  • The trust may involve ongoing administrative and management responsibilities.

Trust beneficiaries

Beneficiaries of a trust vary based on the type of trust and the grantor's intentions. The trust is typically designed to provide income and financial support to chosen beneficiaries. 

Upon their death or other specified events, the remaining trust assets are distributed to the secondary beneficiaries, such as the grantor's children or other designated heirs. 

This arrangement allows the grantor to take care of their loved ones while ensuring that the assets eventually go to their intended beneficiaries.‍

Beneficiaries have various rights, depending on the type of trust and the state you live in.

Are trusts revocable or irrevocable?

Some trusts are revocable, meaning that the grantor can amend or terminate the trust during their lifetime. This provides flexibility in case the grantor's wishes or circumstances change over time.

The ability to make changes to the trust allows for adjustments to be made to accommodate any shifts in family dynamics, financial situations, or estate planning goals. 

However, it's important to note that once the grantor passes away, the trust often becomes irrevocable, and its terms cannot be modified.‍

An irrevocable trust is one that can’t be easily changed. Making changes usually needs the agreement of all the beneficiaries, and it has to be approved by the court.

Tax implications of trusts

Trusts can have varied tax implications depending on their structure and purpose.

Some trusts are designed to minimize estate taxes by making use of different deductions and exemptions. By transferring assets into such trusts, the grantor can defer or even eliminate some federal estate taxes. 

However, in certain cases, the assets may be subject to estate taxes upon the death of the beneficiary.

Funding a trust

A trust can be funded with a variety of assets, including cash, securities, real estate, and other property.

During the funding process, assets are transferred into the trust, and ownership is redefined accordingly. 

Properly funding the trust is vital to ensure that the assets are protected and distributed according to the grantor's wishes.

The assets you don’t specifically include in the trust can be added (or “poured” into the trust) through a pour-over will. These assets will have to go through probate, though.

How do trusts protect the grantor's assets?

While not all types of trusts provide a high level of asset protection, many can help shield trust assets from potential creditors of the beneficiaries.

Placing assets in a trust separates them from the beneficiaries' individual assets, making it more challenging for creditors to access the trust assets in the event of a financial claim against the beneficiary. 

Additionally, trust assets are shielded from being distributed to unintended beneficiaries, such as a future spouse or children from a subsequent marriage. 

This feature ensures that the assets are distributed in accordance with the grantor's intentions and provides a level of protection against unexpected outcomes.

How much control does the grantor of a trust have?

The level of control a grantor retains over a trust varies depending on the type of trust. In the case of revocable trusts, the grantor can modify or terminate the trust during their lifetime. 

They can also designate the ultimate beneficiaries of the trust assets. This level of control allows the grantor to adapt the trust to changing circumstances, such as updating beneficiaries or adjusting asset allocations.

However, it's important to note that while the grantor can maintain control over the trust assets and decisions, the beneficiaries are entitled to receive income and financial support from the trust during their lifetime. 

This feature ensures that beneficiaries are cared for financially and can benefit from the assets held within the trust.

Remember that each type of trust comes with its own set of rules, benefits, and limitations, and the above table is a simplified summary of these characteristics. 

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