Types of Trusts

Testamentary Trusts

A testamentary trust is a trust created by a Will.  Such a trust has no power or effect until the Will of the donor is probated.  Although a testamentary trust will not avoid the need for probate and will become a public document as it is a part of the Will, it can be useful in accomplishing other estate planning goals.  For instance, the testamentary trust can be used to reduce estate taxes on the death of a spouse or provide for the care of a disabled child.

Inter Vivos Revocable Trusts

Revocable trusts are often referred to as "living" trusts.  With a revocable trust, the donor maintains complete control over the trust and may amend, revoke or terminate the trust at any time.  This means that you, the donor, can take back the funds you put in the trust or change the trust's terms.  Thus, the donor is able to reap the benefits of the trust arrangement while maintaining the ability to change the trust at any time prior to death.

Revocable trusts are generally used for the following purposes:

1. Asset Management.  They permit the named trustee to administer and invest the trust property for the benefit of one or more beneficiaries.
2. Probate Avoidance.  At the death of the person who created the trust, the "grantor" or "donor," the trust property passes to whoever is named in the trust.  It does not come under the jurisdiction of the probate laws and its distribution need not be held up by the probate process.  However, the property of a revocable trust will be included in the grantor’s estate for tax purposes.
3. Tax Planning.  While the assets of a revocable trust will be included in the grantor’s taxable estate, the trust can be drafted so that the assets will not be included in the estates of the beneficiaries, thus avoiding taxes when the beneficiaries die.

Inter Vivos Irrevocable Trusts

An irrevocable trust cannot be changed or amended by the donor.  Any property placed into the trust may only be distributed by the trustee as provided for in the trust document itself.  For instance, the donor may set up a trust under which he or she will receive income earned on the trust property, but that bars access to the trust principal.  This type of irrevocable trust is a popular tool for Medicaid asset protection planning.

Special Needs Trusts

The purpose of a special needs trust is to enable the donor to provide for the continuing care of a disabled spouse, child, relative or friend.  The beneficiary of a well-drafted special needs trust will have access to the trust assets for purposes other than those provided by public benefits programs.  In this way, the beneficiary will not lose eligibility for benefits such as Supplemental Security Income, Medicaid and low-income housing.  A special needs trust can be created by the donor during life or be part of a Will.

Credit Shelter Trusts

Credit shelter trusts are a way to take full advantage of the estate tax exemption.  The first $2 million (in 2006) of an estate are exempt from taxes, so theoretically a husband and wife would have no estate tax if their estate is less than $4 million.  However, if one spouse dies and leaves everything to the surviving spouse, the surviving spouse may have an estate that is greater than $2 million.  When the surviving spouse dies, any part of the estate over $2 million will be subject to estate tax.

To avoid this problem, the spouses can create a credit shelter trust as part of their estate plan.  When one spouse passes away, the first $2 million of that spouse's estate is put in to a trust.  The surviving spouse can receive income from the trust, but as long as he or she does not control the principal, the money will not be included in the surviving spouse's estate when he or she passes away.

Copyright © 2004-2009 Levandowski & Darpino, LLC. All rights reserved.

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation. Copyright © 2009 by Levandowski & Darpino, LLC. All rights reserved. You may reproduce materials available at this time for your own personal use and for non-commercial distribution. All copies must include this copyright statement.