Different Types Of Trusts: Which Is Right For You?

Revocable trusts are made during your lifetime so they are also called “inter vivos trusts” or “living trusts.” Usually, you initially name yourself as the trustee so you can keep managing any of the assets you put into it.

When you create your revocable trust, you should name a successor trustee. This successor will assume responsibility for managing assets if you become incapacitated or die. When you pass away, the successor trustee facilitates the transfer of assets to your chosen beneficiaries according to your instructions.

Assets held in a revocable trust transfer outside of the probate process that’s normally required when you pass away. Because it involves court filings, it means that information about the disposition of your estate can also be available to the public. Many people use revocable trusts specifically to avoid probate. It is important to note that assets can still be subject to estate taxes even if they are held in a revocable trust and transferred outside of this process.

Since the trust creator still has control over assets in the trust while they are alive, this type of trust also doesn’t provide strong protection against creditor claims.

Pros of Revocable Trusts

• You can avoid probate process, which can be costly and time consuming
• You can easily modify the terms or terminate the trust
• You can keep information about your assets private
• In case you become incapacitated, your successor trustee can manage your assets

Cons of Revocable Trusts

• Your trust is not protected from creditors
• You are still subject to estate taxes
• It can be expensive due to the administrative costs involved, including re-titling costs

Irrevocable trusts can also be created during your lifetime, but unlike revocable trusts, they can’t be easily modified. You give up more control over the assets that you put into an irrevocable trust.

There are some upsides to this, including that the assets are often better protected against creditor claims and can sometimes be transferred after your death without being subject to estate taxes.

Pros of Irrevocable Trusts

• Your assets are protected from creditors
• You can avoid estate taxes on trust assets

Cons of Irrevocable Trusts

• They can be extremely difficult to modify
• You cannot name yourself as the trustee
• You do not have control over the assets once they are transferred

Testamentary trusts are created in a last will and testament and become active after the probate process. These trusts are often made if you want to leave money or property to someone who can’t manage it independently and if you don’t want the court to have to appoint a guardian to manage it for them.

You will simply include a clause in your will specifying that certain assets should be put into trust, designating a trustee, designating a beneficiary and providing instructions for how long the trustee should manage the assets.

Pros of Testamentary Trusts

• Your assets are protected from the creditors as they are separate from your personal assets
• Your estate taxes are reduced
• You can easily modify the terms during your lifetime

Cons of Testamentary Trusts

• Since the assets are distributed after the probate process, it can be time-consuming
• It may be expensive and complex due to the mandatory probate process
• The terms of the trust and asset distribution become public record

Charitable remainder trusts allow you to set up a trust to provide a donation to a charitable organization. You are able to claim a tax break up front for part of the value of the assets you contribute to this type of trust.

You’ll need to name a charitable beneficiary or a qualifying charity that will receive the trust assets. You can also name non-charitable beneficiaries. They can receive income from the trust, either equal to a fixed percentage or a fixed amount, for a designated period lasting as long as their lifetimes or 20 years.

Pros of Charitable Remainder Trusts

• You can claim immediate tax deductions for the assets contributed
• You can receive predictable income for a specific period of time
• They can reduce your total estate tax liability
• Your assets are protected against creditor actions

Cons of Charitable Remainder Trusts

• You lose control over the assets once they are transferred
• They are subject to stringent IRS regulations

Special needs trusts allow you to provide for a disabled loved one.

When someone is disabled, they often receive means-tested government benefits. For example, eligibility for both Supplemental Security Income (SSI) and Medicaid can be lost if a person has too many assets. A special needs trust allows you to provide supplementary funds for someone receiving these or other benefits without causing them to lose their government aid because the assets are not in their name.

You name a trustee to manage the assets you are leaving for a disabled person who might be unable to manage those assets on their own.

Pros of Special Needs Trusts

• The beneficiary can maintain eligibility for government benefits
• Assets are protected from creditors
• They can be customized based on the specific needs of the beneficiary

Cons of Special Needs Trusts

• The trust’s terms may be extremely difficult to modify
• They cannot be created for beneficiaries older than 65 years

Pet Trusts

Pet trusts allow you to ensure your pet is cared for after you die or become incapacitated. The terms of the trust can be extremely detailed and include specific instructions to provide proper care based on your pet’s needs. You must name a trustee who will hold the money and a caretaker who will use the money dispensed as per the trust’s terms to care for your pet (this be the same person if you wish).

Asset Protection Trusts

Asset protection trusts are generally created to protect assets from creditors or for other singular purposes like meeting Medicaid’s asset limit if you have too many assets. There are broadly two types of asset protection trusts that can be created based on your needs—domestic asset protection trusts and foreign asset protection trusts.

Gun Trust or NFA Trust

Gun trusts are created to hold and transfer firearms, which are restricted by the National Firearms Act (NFA) to avoid cumbersome paperwork and heavy taxes. They also help bypass the rule that only one person can own and possess an NFA firearm. You can name multiple trustees who can possess the gun, and it can be passed down to your successors even after your death without any transfer formalities.

Trusts for Married Couples

Married couples can create trusts to secure income for the surviving spouse and their heirs after one of them dies. This way, when one spouse dies or becomes incapacitated, the trust continues with the other spouse retaining full or partial control over it.

Types of Married Couple Trusts

Here are a few types of trusts married couples can create:

• Credit Shelter Trust: Married couples create a Credit shelter trust to transfer assets to their heirs while reducing or completely avoiding estate taxes. This type of trust involves each spouse creating two separate trusts. After one spouse dies, their trust passes down to the surviving spouse.
  This way, they can benefit from the estate tax exemptions during the first transfer from one spouse to the other and subsequent transfers to their heirs after the surviving spouse dies.
• QTIP Trusts: Qualified Terminable Interest Property trusts are created to provide income to the surviving spouse after the first spouse dies and transfer the assets to other beneficiaries after the surviving spouse’s death. These types of trusts help reduce or avoid estate taxes and are especially beneficial for people who have kids from previous marriages.
• Marital Disclaimer Trusts: To create a marital disclaimer trust, a disclaimer clause is generally included in a person’s will that takes effect after their death. The assets are moved to the trust, and the surviving spouse can derive certain benefits from it as specified in the trust’s terms without paying estate taxes.

The right type of trust for you depends on your goals and the specifics of your situation. For example:

• A revocable living trust provides you with more flexibility. You can use it to protect your assets in case of incapacity and to avoid having assets transfer through probate, but cannot use it to protect against creditor claims or avoid estate taxes.
• An irrevocable trust provides you with more protection. While you can’t modify it, creditors can’t easily make claims against it, and assets held within it can generally be passed on to beneficiaries without being subject to estate tax.
• A testamentary trust can be created in your will and can make sure that an appropriate trustee is taking care of assets you are leaving to heirs who cannot effectively manage their own inheritance.
• A special needs trust can be used to provide for a disabled loved one who needs continued access to means-tested government benefits.

There are also other specialized types of trusts you could use in certain situations, so talk with an estate planning attorney to see what kinds of tools best allow you to establish your legacy.