Trusts are an important piece of your estate planning arsenal; the reasons why can differ depending on the type of Trust. There are many types but I will not be discussing them all or going into great detail.

My Series has an Elder and Special Needs Law focus, so the later discussion of specialized Trusts (in the coming weeks) will go into more detail. For example, when discussing Medicaid Planning, I will delve into the Medicaid Asset Protection Trust. When discussing Special Needs Planning, I will explain the types of Supplemental Needs (a/k/a Special Needs) Trusts.

As is my intent throughout the Series, I will be laying a foundation that can carry you forward.

Generally, the Grantor’s objectives can also determine the type of Trust.  The Grantor is the person who creates the Trust for either their own benefit or for others.  Some may refer to a Grantor as a “Trustor.”

Another concept to understand is that a Trust is a fiduciary agreement, where the Grantor names a person or persons, called a Trustee or Co-Trustees, to hold/manage assets for the beneficiaries.

A Trust distinguishes itself from a Last Will and Testament, in that the former is not subject to Probate. In the second article from the Series, I defined Probate as the judicial proceeding wherein the Court names an Executor who then marshals and distributes the decedent’s assets to the beneficiaries.

When an asset is non-probate, it means that it passes directly to the named beneficiary. For example, a life insurance policy is a non-probate asset.

When discussing Trusts, whatever asset(s) is/are named within the Trust (if the Trust was drafted or written correctly) will “pass” directly to the named beneficiary without a Court proceeding. But as an example, if it is residential property the beneficiary needs to effectuate a deed change for ownership to change legally.

As I mentioned at the beginning of the article, there are many types of Trusts so they all start with these two:

1. Inter Vivos (Living) Trust and
2. Testamentary Trust

All Trusts will first fall under one of the above categories.

First, the Testamentary Trust

A Testamentary Trust is one that is established through the Grantor’s Last Will and Testament or interestingly enough …an Inter Vivos Trust.

A Testamentary Trust can be revoked at any time during the Grantor’s lifetime, if the Last Will and Testament where it is created is modified or revoked.  Once the Testator of the Will dies, the Testamentary Trust becomes Irrevocable (i.e. permanent).

Likewise, if the Testamentary Trust provision of the Inter Vivos Trust is modified/removed, or if the Living Trust itself is terminated, so is the Testamentary Trust.

And whatever objectives an Inter Vivos Trust aims to accomplish, a Testamentary Trust can (pretty much) do the same.

The Inter Vivos Trust

An Inter Vivos or Living Trust is one that is established during the Grantor’s lifetime. There are many types- again-depending on the objective(s).

Briefly, an Inter Vivos trust can be created (and this is not an exhaustive list):

• To shield assets from potential future creditor
• To hold life insurance policy (ies)
• To hold money
• To hold property -residential or commercial
• To hold assets for minors
• To provide for different beneficiaries at different times (i.e. a surviving spouse and then to Grantor’s children after spouse death).
• For the benefit of a charity
• As a Credit Shelter or Family Trust (estate tax benefits)
• To provide for a non U.S. Citizen spouse
• To produce a lifetime financial benefit to the Grantor and/or the beneficiaries
• To produce a tax benefit for the grantor and/or the beneficiaries

In the Inter Vivos Trust category, there are two further sub categories:

1.     Revocable Trust and

2.     Irrevocable Trust

A Revocable Trust is one where the Grantor retains control; it can also go by the name Grantor Trust. The Grantor can:

– Amend or modify the terms (i.e. remove, buy or sell assets from the Trust) and/or

– Replace/change the beneficiaries of the Trust and/or

– Name themselves a beneficiary and/or

– Terminate the Trust altogether.

The Grantor can act as the Trustee.

The assets in the Trust remain in the Grantor’s estate.

The assets in the Trust are taxed as part of the Grantor’s estate (personal income tax, Form 1040); the Trust is not a separate entity.

A Revocable Trust becomes Irrevocable at death of the Grantor.

NOTE: Beneficiaries do not pay tax on distributions since Grantor has already done so.

An IrrevocableTrust is one where

– The Grantor cannot amend or modify the terms and/or;

– The Grantor cannot terminate the Trust and/or beneficiaries;

– Once created (and funded), the Grantor has no control over it;

– The Grantor no longer has ownership rights over the assets within the Trust; and

– The Grantor cannot act as Trustee.

The Grantor could only have the right to the assets, if they named themselves a beneficiary. The Trust would need certain provisions/distribution language included to accomplish this. If done incorrectly, it could prejudice the Trust’s objectives.

The assets in an Irrevocable Trust move out of the Grantor’s estate.

The Irrevocable Trust is taxed as a separate entity (Form 1041).

The Irrevocable Trust is an attractive option for Grantor’s looking to protect assets from potential future creditors or to limit or eliminate estate taxes.

NOTE: Beneficiaries do have to pay income taxes on the distributions.

So, there you have it, a bare bones primer on Trusts. If you remember the above, all the puzzle pieces will (hopefully) fall into place as we continue along in my Series.

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