July 13, 2021
What Are All the Types of Trusts One Can Have?
There are many different types of trusts that one can create to take care of their estate and loved ones after they pass. Mazzoni Karam Petorak & Valvano’s team of Scranton estate planning attorneys can help you figure out which ones work well for what you need, and which ones may not be entirely possible.
There are so many types of trusts that we don’t typically work with everyone single one of them at a time. Some are for very specific instances that few people need, and some are so general that they don’t quite accomplish everything that needs to be done. To help you understand what you may be looking for before consulting with us, we’ve provided descriptions of all the types of trusts one can have.
The Types of Trusts We Provide
It’s important to know what we work with. This isn’t to say we don’t or can’t work with the other types of trusts, but they aren’t anywhere near as common as the following.
These trusts are the general ones, which more specific trusts fit into. It’s the classic, every square is a rectangle, but not every rectangle is a square conundrum.
- Living Trust (Revocable Trust): This is one of the broadest types of trusts. Many of the other trusts that we’ll list next can count as living trusts, or revocable trusts as they’re also known. You create these during your lifetime, and you can change or terminate them at any time. The assets in this trust are taxed as your assets for both your income and estate, rather than the person receiving assets from the trust.
- Testamentary Trust (Irrevocable Trust): Also known as irrevocable trusts, these cannot be changed after being created, with set rules that govern the who, when, and why for when the trust can be accessed. A trust can go from a living to a testamentary trust once the person who created it dies or becomes unable to make changes. This means the rules can never be changed. The final trust is how the assets will be distributed.
- Grantor Trust: This is when the person making the trust is taxed by the IRS on any income the trust earns. This avoids probate, protects the trust’s assets, and reduces income tax, particularly for the person intended to receive money from the trust.
These trusts have a particular purpose in mind beyond leaving one person money. They can be to provide for a specific need or organization rather than giving someone money.
- Special Needs Trust: This one is far less general than the others, as it is created to care for individuals with physical or mental disabilities by a donor. These typically start as revocable/grantor trusts that become irrevocable. They’re designed to provide the beneficiary with the care they need while allowing the beneficiary to qualify for federal programs such as Supplemental Security Income, Medicaid, and low-income housing.
- Medicaid Trust (Income Only Trust): This is a strictly irrevocable trust, similar to the Special Needs Trust. This is even more specific, only meant for an individual in need of skilled nursing care. Like the Special Needs Trust, this is also designed so that the beneficiary can still receive medical assistance and be protected from estate recovery.
- Charitable Trust: Charitable trusts are created to provide financial assistance to one or more nonprofit organizations. Charitable lead trusts pay a set amount or percentage to one or more charitable organizations each year for a specified period of time, with the remainder going to another beneficiary. Charitable remainder trusts pay a set amount or percentage to one or more heirs for a specified period of time, and the remainder going to charity.
These aren’t the kind of trusts many know about. They sometimes fall under the label of more encompassing trusts but tend to serve a specific purpose less related to the beneficiary. If you think there is a threat to your assets, you want to look into one of these.
- Asset Protection Trust: This trust is designed to protect someone’s assets from potential creditors. They are designed outside of the United States and aren’t inherently meant to hold assets to give to someone after the original owner dies. It’s common for these trusts to be irrevocable for a number of years with the asset owner not being the current beneficiary, but later dissolving it once there is no risk of a creditor attack.
- Constructive Trust: This is an implied trust, not something you would create ahead of time. The court would establish one of these based on facts and circumstances surrounding a property owner’s intentions before they pass. You would want representation here to assist in determining what the deceased intended for this implied trust.
- Spendthrift Trust: This is a trust that comes with stipulations preventing the beneficiary from selling or promising any of the trust’s assets. This can only last until everything is distributed, but works to protect the trust’s assets from creditors.
- Tax By-Pass Trust: Created by one spouse for another to limit the federal estate tax that is payable on the death of the second spouse. Sometimes assets can be taxable upon the children of a couple at up to a rate of 55%. This works to avoid that.
The Scranton Estate Planning Lawyers Who Will Protect Your Assets
The main point of a trust is to not only provide for who you leave behind but also to protect what you leave your loved ones with. Creditors and taxes work hard to get whatever they can from your estate after your death just as they did during your life. Protect what you have accumulated for the next generation. Talk to our Scranton estate planning lawyers to figure out which trust is best for you.