What Are the Different Types of Trusts?

The Benefits of Trusts

Before arranging a trust, you should make sure you are aware of the benefits of each type and how they suit your needs. This ensures that your assets are distributed according to your wishes when you pass away. 

One of the main benefits of trusts is that assets can often be distributed quickly and with few hoops to the beneficiaries, family members, or a surviving spouse. Unlike a will, a trust can typically be used to avoid probate court when distributing trust assets. Avoiding probate also ensures privacy, as probate is a public record.

Using a trust can also save money in both court fees and estate taxes. It can also aid in protecting your estate from creditors as well as beneficiaries who have poor money management skills.

As mentioned above, specific control is another benefit of trusts. When you set up a trust, you can dictate the precise terms for the distribution of wealth and assets. This can be especially beneficial in situations where there are complex family arrangements or a large amount of generational wealth.

What are the different types of trusts? The three main types of trusts

You may be asking yourself, What kind of trust should I have? Knowing what type of trust is the best for you really depends on what you’d like the terms to be and what your personal plan and goals call for. Following is a short summary answering a popular question: What are the three types of trusts? Speak to a wealth manager or an estate planning attorney for more information and guidance on what type of trust is best for you.

Living Trust

A living trust is also called a revocable trust. It is also one of the most common types of trusts. A revocable living trust is like having a will that can be easily changed at any time. This low-maintenance arrangement helps you avoid the probate process and considers you as the owner of the assets, even though those assets are being managed by the assigned trustee.

The trust grants you the ability to amend or revoke the trust as you see fit during your lifetime. You can also continue to earn income on the assets included in your trust. However, upon your death, the revocable trust becomes irrevocable. While there is no specific tax advantage to a revocable trust, the flexibility to make changes is very appealing.

Testamentary Trust

Testamentary trusts are created by your last will and testament upon your passing. Unlike a living trust, which avoids probate, the assets contained in a testamentary trust will still go through a court process. The main benefit of testamentary trusts is that the assets do not need to be transferred to the trust until your death. Two benefits of trusts arranged in this way are that you don’t have to fund the trust during your lifetime and you still maintain control and access to all of your assets.

Irrevocable Trust

An irrevocable trust, while still created during your lifetime, is one that cannot be changed. Upon its creation, all included assets are transferred to the trust. Even though you are the benefactor, you no longer have a right to the assets. However, this also means that you can no longer be taxed on them by the IRS as a part of your taxable estate.

Other types of trusts

We’ve answered the question, What are the four types of trusts? But while those are the main types you might consider, there are other different types of trusts you should also be aware of in order to provide the best for your loved ones or a named beneficiary.

Grantor Retained Annuity Trust (GRAT)                 

This type of irrevocable trust is created to ensure that the future appreciation on quickly appreciating assets can be quickly and easily granted to the next generation during the grantor's lifetime. It is a good trust for establishing generational wealth.

Charitable Trust

A charitable trust is created to distribute assets to chosen charities. The trust can be arranged in a manner that distributes assets to both a charitable organization(s) and your beneficiaries. There are also a few types of charitable trusts with different terms, allowing you to ensure your remaining assets are distributed in the manner you wish. Speak to a fiduciary about a charitable lead trust, a charitable remainder trust, and others if you are interested in this type of trust.

Spendthrift Trust

If you’ve selected a beneficiary that may not be the most financially responsible individual, a spendthrift trust might be suitable.  Instead of granting the beneficiary or multiple trust beneficiaries all your assets as one large inheritance, the terms of the trust will transfer assets in increments This trust fund prevents the depletion of your generational wealth and also protects the assets from creditors.

Totten Trust

Somewhat similar to the spendthrift trust is the Totten trust. This is a trust that is set up while you are alive, usually at a bank. Although a beneficiary is named, they do not have access to the funds until your death.

Special-Needs Trust

This type of trust is created for beneficiaries that have disabilities and may be receiving financial support from the government. Often, financial support from government benefits is limited or disqualified if the special-needs individual does not meet specific income requirements. This trust can provide additional financial support without fear of disqualification.

Generation-Skipping Trust

Suppose you want to pass down assets or generational wealth to your grandchildren. You would set up a generation-skipping trust to skip over your own children and pass the inheritance to your grandchildren.