Types of Trusts
Common Types of Trusts
While the basic structure of a trust remains pretty much the same, there are several different types of trusts with different purposes and specifics. The five main types of trusts are living, testamentary, revocable, irrevocable, and funded or unfunded.
But even beyond those, there are dozens of kinds of trust funds. Each different kind has its own uses and purposes, but most follow the same basic structure of a traditional, three-party trust.
1. Living Trust
A living trust, sometimes known as an inter-vivos trust, is one made by a Settlor (grantor) during his or her lifetime, with assets or property intended for the individual’s use during their lifetime. This type of trust allows the Settlor to benefit from the trust while alive, but passes the assets and property on to a beneficiary (using a trustee) upon their death. With a living trust, you are generally able to avoid probate court, provided the trust is funded.
2. Testamentary Trust
A testamentary trust, often called a will trust, is an agreement made for the benefit of a beneficiary once the Settlor has died, and details how the assets must be endowed after their death. This type of trust is often instituted by an executor, who will manage the trust for the Settlor’s antecedents after their will and testament has been created. And, a testamentary trust is irrevocable (cannot be changed or altered).
3. Revocable Trust
A revocable trust, like a living trust, is created during the Settlor’s lifetime. It is able to be changed, terminated, or otherwise altered during the Settlor’s lifetime by the Settlor themselves. It is often set up to transfer assets outside of probate. In this case, all three parts of the arrangement (the Settlor, trustee and beneficiary) are often the same person who can manage their own assets, but will be given over to a successor trustee and other beneficiaries upon the original Settlor’s death.
4. Irrevocable Trust
On the contrary, an irrevocable trust is one that a Settlor (grantor) cannot change or alter during his or her lifetime or that cannot be revoked after his or her death. Because this type of trust contains assets that cannot be moved back into the possession of the Settlor, irrevocable trusts are often more tax efficient – with little to no estate taxes at all. For this reason, irrevocable trusts are often the most popular as they transfer assets completely out of the Settlor’s name and into the next generation or beneficiary’s name. However, a living trust can be either revocable or irrevocable based on its specifications.
5. Funded or Unfunded Trust
Funded or unfunded trusts are trust agreements that either have funds (assets) put into them or do not. These trusts can become funded at any point, either during the life or after the death of the Settlor.
6. Credit Shelter Trust
A credit shelter trust, also known as a bypass trust or a family trust, is a trust fund that allows the Settlor to grant the recipients an amount of assets or funds up to the estate-tax exemption. Basically, this allows the Settlor to give a spouse or family member the remainder of the estate tax free. These kinds of trusts are often very popular due to how the estate remains tax free forever, even if it grows in size.
7. Insurance Trust
An insurance trust allows the Settlor to combine their life insurance policy within the trust, keeping it free from taxation on the estate itself. This kind of trust is irrevocable and doesn’t allow the Settlor to change or borrow against the life policy itself, but allows the life policy to help pay for post-death expenses on the estate.
8. Discretionary Trust
A discretionary trust is where the trustees use their discretion to decide who may benefit from the trust and when. It is created by means of a gift, and the beneficiaries are not fixed. The beneficiaries cannot demand their rights from the trustees. Depending on how the trust is set up, you, as the settlor, may or may not be able to be a beneficiary of the trust.
9. Charitable Trust
A charitable trust is a trust that has a charity or non-profit organization as the beneficiary. In normal cases, this type of trust would be built up during the Settlor’s lifetime and, upon their passing, be doled out to a charity or organization of the Settlor’s choosing, avoiding or reducing estate taxes or gift taxes. A charitable trust could also be part of a normal trust, wherein the Settlor’s children or inheritors would receive part of the trust upon their passing, with the remainder of the estate going to the charity.
10. Blind Trust
A blind trust is a trust that is handled solely by the trustees without the beneficiaries’ knowledge. These trusts are often used to avoid any conflicts between the trustees and beneficiaries or between beneficiaries.