Trusts types and purposes and how they work in an estate plan.
A trust is an agreement that the Grantor, (person who makes the fiduciary agreement to create the trust) makes to allow a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries. Trusts continue to exist after the death of the Grantor as a separate entity and therefore avoid probate in determining how and when to pass trusts assets to beneficiaries.
There are two types of Trusts. Revocable or Irrevocable. Revocable trusts are exactly that during the life of the "Grantor", Revocable by the Grantor so the assets, income, and tax treatment are treated as owned by the Grantor for most practicable purposes. When the Grantor dies the Trust becomes irrevocable and the trust assets are part of the Estate but are already owned by the Trust so there is no probate needed to transfer your assets. When the trust becomes irrevocable the transfer of assets into the trust is complete and the Trust at that time must act as a separate entity completing it's own tax forms (similar to a business entity).
You can also create an irrevocable Trust while you are living which becomes an entity of its own immediately and any transfer of assets to the Trust are considered complete now rather than at your death. Therefore the Trust owns the assets when you transfer to it and any transfers are considered gifts and will apply against any gift exemptions. There are reasons to do this for Tax planning, however you also give up the step up basis assets receive at your death by transferring them now to an irrevocable trust so planning with a comprehensive estate planning professional is key to properly setting up your Estate Plan using trusts.
A trust is used for different purposes depending on the language and assets put into the trust and therefore have different names but ultimately are still either revocable (Living Trust) or irrevocable. Some Trust purposes are listed below.
Marital Trust - To provide benefits to a spouse and is usually included in the surviving spouse's estate for estate tax purposes. This is usually used with a bypass or Credit Shelter Trust to split a marital trust assets for estate tax planning.
Bypass or Credit Shelter Trust - to bypass the surviving spouse's estate to make full use of each spouse's federal estate tax exemption.
Testamentary Trust - These are created in a Will at the time of the "Grantor's" death and may be subject to probate, taxes, and court supervision depending how it is setup.
Irrevocable Life Insurance Trust - ILIT for the purpose of excluding life insurance proceeds from the deceased's taxable estate.
Charitable Lead Trust - This trust allows benefits such as income to go to a charity and the remainder to your beneficiaries.
Charitable Remainder Trust - Allows you to receive income from the Trust assets for a defined period of time but then any remainder goes to a charity.
Generation Skipping Trust - Using the generation skipping tax exemption, Trust assets may be distributed to grandchildren or later generations without incurring either a generation skipping tax or estate tax on the death of your children.
Qualified Terminable Interest Property Trust, QTIP - used for the purpose of provding income to a surviving spouse but upon spouse's death the assets go to other beneficiares named in the Trust.
Grantor Retained Annuity Trust - GRAT is used for the purpose of funding an irrevocable trust now to shift future appreciation to the Trust and its beneficiares rather than at the death of the Grantor while providing an annuity (income stream) back to the Grantor during Grantor's lifetime.
Trusts designed for the purpose of providing resources to persons who also receive public benefits due to special needs or a disability. These types of trust have restrictions on what may be distributed to the beneficiary and require an accouting filed annually with the MN DHS.
Special needs Trust - Funded by the Beneficiary and assets are owned by beneficiary.
Supplemental needs Trust - Funded by someone other than the beneficiary and assets are not considered owned by the beneficiary.
Other (almost unlimited types of Trust purposes which take advantage of various IRS and Tax planning strategies for asset protection and estate planning such as
DAPT (Domestic Asset Protection Trust)–self-settled domestic asset protection trusts that permit access by naming the grantor as a beneficiary.
Hybrid DAPTs –non-self-settled trusts that permit access by giving someone a non-fiduciary power to add beneficiaries from a class that includes the grantor.
SPAT (Special Power of Appointment Trust)
SLAT (Spousal Lifetime Access Trust) - spousal lifetime access trusts that permit each spouse to be a beneficiary of the trust created by the other spouse
SPLATsSM–Split purchase annuity trusts -two parties purchase an interest in an asset (e.g. the client and a GST exempt trust) and share ownership much like a GRAT.
SPATs–Special power of appointment trusts that permit access but avoid self-settled trust status.
Split Purchase TrustsSM –Like a SPLAT, but for real property.
Etc. (The list could keep going on, which is why it is important to consult an Estate Planning professional attorney or law firm.
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