Trusts are a common estate planning tool drafted by estate planning attorneys to achieve a wide variety of objectives including asset protection, legacy goals, privacy, special needs planning, and navigating complex family dynamics to name a few. As such, trusts are created in many different types with specific legal provisions that specify exactly how and when assets pass to the beneficiaries. Important to note, not all types of trusts will achieve all of the objectives making it important to select the correct type of trust. To help develop a primer on trusts, we will cover some of the basic trust lingo and common types of trusts in this article.
So, what is a trust? A trust is a legal entity created by an attorney that arranges for a fiduciary, called a trustee, to hold assets on behalf of the grantor for a beneficiary or multiple beneficiaries.
Let’s define some important trust terms:
Probate: the legal process occurring when a person dies that involves validation and administration of their will, or if no will was created, distribution of the estate according to state law.
Property in trust typically avoids probate which can be expensive and time consuming in some states.
Trustee: a person or firm with a fiduciary responsibility that holds title to property or assets for the trust beneficiaries.
A grantor can name themselves as trustee for some types of trust. For other types of trusts, an independent trustee is more appropriate or, in some cases, required.
Grantor: the individual or entity that creates a trust.
If you own the property that goes into the trust, you and/or your spouse are the Grantor(s).
Beneficiary: the individual or entity who receives the assets within trust.
There are many ways to structure how, when and who receives assets in trust. It could include children from prior marriages or charitable organizations.
Revocable: A type of trust that allows the grantor to retain control of the assets in trust during their lifetime. After the grantor’s death, the trust becomes irrevocable, and if properly funded, can act as a will substitute.
Important Note! Since the grantor still has control over assets and can use them for his/her benefit during their lifetime, assets in a revocable trust will be included in your taxable estate. Also, assets must be retitled into the name of the revocable trusts!
Irrevocable: A type of trust that typically transfers assets out of your (the grantor’s) estate.
The idea behind irrevocable trusts is that it removes assets from the grantor’s estate; therefore it is not included in estate taxes and is protected against creditors. However, in exchange the grantor loses control over the assets and cannot change the terms of the trust. A grantor cannot be trustee of their own irrevocable trust.
Testamentary Trust: Outlined in a will and created through the will after death.
This trust is not actually created and funded until the death of the grantor. Therefore, assets may still be subject to probate and transfer taxes.
Inter Vivos (also called “Living”) Trust: Created and funded during the life of the grantor.
This trust can be revocable or irrevocable, depending on the grantor’s objectives. There is typically a lookback period for irrevocable trusts funded shortly before death (as to avoid transfer taxes).
Now that you have some basic trust language in your vocabulary, it’s time to look at a few basic types of trusts and why you might want to consider one. Ultimately, you will want to consult with an estate planning attorney prior to deciding if a trust is appropriate and which type of trust suits your objectives.
Below is a list of common types of trusts:
Marital (also known as “A”) Trust*
Bypass (also known as “B”) Trust*
Irrevocable life insurance trust (also known as ILIT)
Charitable lead trust
Charitable remainder trust
Generation Skipping Trust (also known as GSST)
Qualified Terminable Interest Property (QTIP) Trust
Grantor Retained Annuity Trust (GRAT)
*These trusts are often combined to create a Revocable “A/B” Trust.
An important consideration in selecting the right estate planning strategy is the ability to retain flexibility. Changes in the estate tax exemption, such as that of the 2017 Tax Cuts and Jobs Act (TJCA) which more than doubled the exemption from $5.4 million in 2017 to $13.61 million in 2024, can dramatically change the approach used by estate planners. The TCJA reduced the reach of the federal estate tax to historic lows, with 2019 seeing only 8 of every 10,000 people who died with an estate large enough to trigger the tax according to the Institute on Taxation and Economic Policy.
In summary, as you work with your advisors on your estate plan keep in mind that the political and legislative environment can make appropriate strategies a moving target. Revisit your plan every 3-5 years or when a significant change in law or life happens. Remember, the best estate plans will have flexibility built-in, accounting for the current tax and legal environment, and be designed to achieve your legacy goals.
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