An estate plan allows one to transfer their assets smoothly and quickly to beneficiaries after they pass away. Furthermore, one of the most common documents to include in an estate plan is a trust document that allows someone to place their assets into the care of a third party who will distribute these assets to the person’s family, friends, and favorite charity. There are many benefits to utilizing a type of trust during estate planning. However, if someone does not have an estate plan that includes one or more types of trusts, family conflict, higher tax burdens, and probate costs can occur. This article will outline both important terms to know before setting up a trust, and the most common types of trusts.

Important Trust Terms

Grantor

A grantor—also commonly referred to as a trustor or settler—is the person who creates or establishes a trust. Furthermore, the grantor has the legal authority to transfer property or assets into the trust.

Trustee

A trustee is a person or entity that holds, manages, and eventually distributes property or assets for the benefit of a third party. Because the trustee oversees and manages the assets within a trust, to be able to serve as a trustee in the United States, a person must be at least eighteen years old and not be experiencing any forms of incapacity.

Beneficiary

A beneficiary can be any person or entity that the grantor of the trust wishes to receive a portion of their property after they pass away. Furthermore, a trust can have as many beneficiaries as desired and give a different portion of assets to each beneficiary.

Property

Property refers to the assets in the trust. While this can include real property such as a house, it can also mean cash, jewelry, artwork, securities, and automobiles. Depending on the type of trust, the property may be put into the trust when the trust is created or after the grantor passes away.

Revocable

If a trust is revocable, the grantor may alter the terms of the trust as many times as they desire. These revisions can include the number of beneficiaries and trustees or the number and type of assets in the trust.

Irrevocable

If a trust is irrevocable, it cannot be modified or revoked in any way after it is initially established.

Taxes

Taxes are an important part of trusts as each type of trust has different tax requirements. Certain trusts must obtain a federal identification number and file a tax return every year. However, other trusts can use the grantor’s tax identification number.

Understanding each of these terms is important no matter what type of trust you establish. Below are the most common types of trusts and the benefits that each trust offers.

10 Common Types of Trusts

Living Trusts

A living trust is a trust created during the lifetime of the grantor. Under this instrument, the grantor acts as the trustee during their lifetime and retains complete control over the corpus of the trust. While the grantor is alive and has the capacity, they have the authority to revoke the trust, change the terms of the trust, remove property from the trust, and add a property to the living revocable trust.

Living trusts offer several advantages.

• Eliminates or reduces the costs and delays associated with probate court.
• Allows a grantor to decide what happens to their assets before they experience health issues or incapacity.
• When the grantor dies, the assets transfer easily and quickly to the beneficiaries.
• The beneficiaries have immediate access to income and assets after the grantor passes away.
• Allows the value and assets that the grantor holds to be private. If an estate goes through probate, they become public record while assets in a trust are not public.

Testamentary Trust

A testamentary trust is a trust created within a will that does not come into existence until after the individual who wrote the will (the testator) passes away. This type of trust is different from a living trust because the trust does not exist during the testator’s lifetime. Furthermore, a testamentary trust becomes irrevocable once the grantor dies.

There are multiple benefits to a testamentary trust. The first benefit of a testamentary trust is that it controls when and how a beneficiary will receive assets under the trust. For example, a testamentary trust may provide that the testator’s son should not receive his one million dollar inheritance until he reaches twenty-five years old. The second benefit of a testamentary trust is that it preserves assets for children from a previous marriage or relationship. In this case, a grantor ensures that assets are left to these children and not kept away from them from the spouse of a new marriage. A third benefit is that a grantor can name charities that they wish to receive a portion of their assets.

Irrevocable Life Insurance Trust

An irrevocable life insurance trust (ILIT) is a type of trust that is strictly funded by the monies from a life insurance policy. In this case, the person with the life insurance policy becomes both the owner and beneficiary of the trust. The grantor will also be able to name other beneficiaries to the trust. For an ILIT to be valid, the grantor of the trust must live at least three years from the time they put the life insurance policy into the trust.

An ILIT is especially useful for wealthy families. Currently, there is a two-million-dollar estate tax exemption. Any assets in an estate above the two-million-dollar threshold can be taxed as high as 45 percent. Thus, by having the ability to remove a life insurance policy from an estate and place it into a trust, you can receive major tax benefits.

Charitable Remainder Trust

A charitable remainder trust allows beneficiaries of a trust to receive income from the trust for a set period of time. Once the period of time passes, the remaining assets in the trust are given to a charity. Because certain assets in the trust go to charities, this type of trust is completely tax-exempt and even reduces the taxable income of the beneficiaries on the trust. Another type of trust that focuses on charity is a charitable lead trust. A charitable lead trust allows you to designate certain assets that will go to your beneficiaries and other assets that will go directly to charity once you pass away.

Qualified Domestic Trust

A qualified domestic trust lets non-citizen spouses benefit from marital deductions that are given to other married couples. In a marriage where both spouses are U.S. citizens, any assets left by one spouse to another spouse transfer tax-free. However, if one of the spouses is not a U.S. citizen, then the marital deduction is not allowable. Thus, a qualified domestic trust is extremely important for a couple where one spouse is not a U.S. citizen.

Generation-skipping Trust

A generation-skipping trust—also called a dynasty trust—allows a grantor to leave a substantial amount of assets tax-free to beneficiaries that are at least two generations younger. Thus, a generation-skipping trust allows a grantor to leave assets to their grandchildren and great-grandchildren. The main benefit of this trust is that the children of the grantor will not have to pay taxes on assets that are meant for the grantor’s grandchildren or great-grandchildren. However, the grantor can specify that the assets be left to their grandchildren while allowing their children to receive any income that the assets generate in the trust.

Spendthrift Trust

A spendthrift trust allows the grantor to leave assets to a beneficiary. Yet the beneficiary cannot sell or pledge any of the assets in the trust. The assets in the trust will only go to the beneficiary at a certain date. The other option is to give the assets to the beneficiary after they complete certain requirements. This type of trust protects the assets within the trust from the beneficiary’s creditors until the date when the assets transfer to the beneficiary. The assets may also not transfer until the beneficiary pays off these debts.

Special Needs Trust

There are important benchmarks that an SNT must meet for it to be a valid trust. These characteristics include:

• A trust which is established for an individual who is under age 65 and disabled; and
• is established for the benefit of such individual through the actions of a parent, grandparent, legal guardian, or court; and
• provides a payback to the State(s) up to all amounts remaining in the trust. This occurs upon the death of the individual or earlier termination of the trust up to the amount of total medical assistance paid.

Government benefits are for needs-based individuals suffering from old age, blindness, or disabilities. Persons with disabilities can receive medical benefits and a small amount of income for food and shelter. To qualify for these benefits, an individual suffering from one of the disabilities must be under an income threshold. One way for persons with disabilities who have received a sum of money to continue receiving Medicaid or Supplemental Security Income (“SSI”) is to create a special needs trust and then place their assets in this device. One key restriction is that an individual can only set up this type of trust if they are under the age of 65. One can fund this type of irrevocable trust with the income and/or resources of an individual with disabilities or from a third party.

The first way that this type of trust can be funded is through a First Party. One creates and funds this type of SNT by the beneficiary and has a payback to the state Medicaid agency upon the termination of the Trust. The other option for an SNT is to create a Third-Party Funded Special Needs Trust—commonly referred to as a Supplemental Needs Trust. You fund this SNT with monies from someone besides the beneficiary.

Asset Protection Trust

An asset protection trust offers similar benefits to a spendthrift trust. This type of trust is designed to protect a person’s assets from claims of future creditors. However, an asset protection trust differs from a spendthrift trust. It does so because the asset protection trust is set up with accounts outside the United States. By placing assets in a trust set up outside of the country, the trust insulates the assets from creditors.

This type of trust is normally set up so it is irrevocable for a number of years. If after this, the creditors are no longer able to take the assets, the assets transfer back to a beneficiary or the grantor. This allows the grantor to control the assets again. It also allows the trust to transfer assets to another beneficiary if the grantor dies or still has creditors.

Totten Trust

A grantor creates a Totten trust by placing money into a financial account that is meant for a beneficiary. This type of trust is revocable and is not completed until the grantor dies. The reason for this is that the beneficiary to the account will not have access to the money in the account until the account transfers into their name. Furthermore, the grantor can use the money in the account at any time.  Additionally, assets in a  Totten trust avoid probate.

To create a Totten trust, the title on the account should include specific language. This includes “In Trust For,” “Payable on Death To,” “As Trustee For,” or identifying initials for each, “IFF,” “POD,” “ATF”. If the account does not include this language, the beneficiary may not be identifiable. If this occurs, the assets may have to go through probate. Finally, a grantor will commonly use a Totten trust with savings accounts, bank accounts, and certificates of deposits.  

Final Thoughts

Trust and estate laws are complex. This is so no matter the type of trust you decide to establish. As such, it is extremely important to have legal representation that can help you correctly set up your trust. The Antonoplos & Associates trust and estate lawyers have over 20 years of experience helping clients in DC, Maryland, and Virginia set up living trusts, testamentary trusts, irrevocable life insurance trusts, charitable remainder trusts, qualified domestic trusts, spendthrift trusts, special needs trusts, asset protection trusts, and Totten trusts. With this knowledge and experience, we can help with any legal issues that occur from setting up your trust.

Furthermore, Peter Antonoplos, founder and managing partner of Antonoplos & Associates has an LLM in Taxation from Georgetown University Law Center. With this knowledge, Peter can help you decide what is the best type of trust for your and your family and maximize the cost savings you receive from setting up a trust in DC, Maryland, and Virginia.

Contact our DC Law Office for More Information

Finally, for more information regarding types of trusts, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding trust and estate law, check out our blog.