Types of Trusts
A testamentary trust is created in a will and takes effect when the grantor dies. A testamentary trust will be subject to court oversight during the probate process. A testamentary trust is often used to distribute after-acquired assets not identified in a will.
Living trust forms fall under two general categories - revocable trust and irrevocable trust. These categories can then be broken into further types, depending on their purpose, such as a charitable trust, special needs trust, Medicaid income trust, family trust, asset protection trust, etc. It's possible for the same person to be named as grantor, trustee, and beneficiary.
Irrevocable trust form - The creator of the trust, called the grantor, cannot terminate or change an irrevocable trust. By using an irrevocable trust form, the grantor will no longer be subject to taxes on it and will not include it as part of his/her taxable estate upon death. Creditors are less likely to be able to claim to assets are owned by the grantor.
Revocable living trust form - By being revocable, the grantor retains a degree of control over the assets. It is also sometimes called a grantor trust. A revocable trust provides less protection from attachment by creditors of the grantor.
Advantages of Trusts
- Privacy - A living trust offers a level of privacy because the assets are owned in the name of the trust. When you compare a living trust vs will, trust forms aren't required to be filed in court, and therefore, aren't a public record. During probate, the terms of a will become a public record.
- Asset protection - A trust asset is owned by and in the name of the trust. In the case of an irrevocable trust, the grantor gives up ownership and control over the asset. Therefore, creditors of the grantor can't claim the asset as long as it's not fraudulently transferred to the trust. A spendthrift trust may also be used to prevent assets from mismanagement by a beneficiary. The trustee will oversee distributions to a beneficiary who may not be competent to handle the proceeds properly.
- Avoiding probate - Property owned by a trust is distributed outside of probate. This way, the costs, efforts, and delay of probate proceedings can be avoided. This is especially advantageous when you own real property in more than one state, so that the cost and burden of multiple probate proceedings are eliminated.
- Tax savings - Large estates with a significant estate tax liability can minimize taxes due through a properly drafted credit shelter trust.
- Separation of assets - For a couple contemplating marriage, putting assets into a trust can prevent them from becoming community property.
- Pet protection - Many states now have legal recognition for a pet trust, allowing your to ensure that your pets are properly cared for if something should prevent you from caring for them.
- Preserving eligibility for benefits - A Medicaid income trust can be established at least five years prior to entering a nursing home to protect eligibility for Medicaid. For beneficiaries with disabilities, a special needs trust form can be used to receive gifts, inheritances, or settlements in lawsuits without being disqualified for disability benefits.
- Dealing with incapacity - Since trustees can continue to manage the property after the death or incapacity of the grantors, the property continues to be handled according to the instructions of the trust document. This is in contrast to a will, in which the beneficiaries of the property are immediately free to do as they wish with the property.