All trusts share these basic attributes:
1. Someone must create the trust.
2. Someone other person or entity, referred to as a trustee, must agree to hold money and/or other assets for someone else. The exception to this is a living trust where the grantor may serve as the sole trustee.
3. Money and/or other assets must be held by the trustee for the benefit of someone else.
4. Someone else, referred to as a beneficiary, must benefit from the trust.
Trusts are classified by their attributes, purposes and method of creation. A listing and synopsis of all types of trusts could easily fill a book. We will focus on a few of the most common classifications.
Living Trust vs Testamentary Trust
A primary classification of trusts is determined by the time they become effective, i.e., does the trust become effective during the grantor's lifetime or does it become effective after the grantor's death?
A trust that becomes effective during the grantor's lifetime is an "inter-vivos trust" which most of us know as a "living trust." The term "inter-vivos" is a Latin term meaning "during life." Most living trusts are created with a written document referred to as a declaration of trust or trust agreement. A layperson may use the two terms, declaration of trust and trust agreement, interchangeably, however there is a distinctly different. A declaration of trust is a trust in which the grantor is also the only trustee and thus he/she is the only party to the trust. On the other hand, if the trustee is different from the grantor there is an agreement between them and thus the term trust agreement.
A trust that becomes effective after a person's death, such as a trust created under a Last Will and Testament is referred to as a "testamentary trust." Since a Last Will and Testament becomes effective only after death, any trust created under a Last Will and Testament can only become effective death. Many people believe that a Last Will and Testament becomes effective upon the testator's death but a Last Will and Testament, and any trust created under it, must be admitted to probate before it becomes effective.
A major advantage of a living trust is that it avoids probate of property properly placed in it during the grantor's lifetime. In addition, a living trust is private while a testamentary trust is public.
Revocable Trust vs Irrevocable Trust
A revocable trust is one in which the grantor reserves the right to revoke the trust or modify and amend any of the provision of the trust after the trust becomes effective.
An irrevocable trust is a trust in which the grantor gives up the right to revoke the trust or make any changes to the provisions of the trust after it becomes effective.
Important note: with regards to living trusts and testamentary trusts, only a living trust can be either revocable or irrevocable. Though this may seem confusing, consider that a testamentary trust, a trust that becomes effective after a person's death, is always revocable during the testator's lifetime since a Last Will and Testament does not become effective until after the testator's death and admittance to probate. You can always revoke a Last Will and Testament and a testamentary trust during your lifetime. However, after death, a testamentary trust becomes irrevocable (as does a Last Will) since the only person that could revoke it is no longer living.
With a revocable living trust, you can change it at any time. Any assets you place in the trust can be taken back, sold, bartered, mortgaged given away or anything else you would like to do with it at any time without penalty. Furthermore, you can change any provision anytime you wish including beneficiaries, what you bequeath to any beneficiary and how the money is managed. You can even determine how the money will be held in trust after your death. All rights to your property are retained when you put it into a living trust and you continue to be treated as the owner of all property in your living trust.
In contrast, if you put property into an irrevocable living trust, you relinquish all rights to that property for good and it can never be undone.
There are some advantages to irrevocable trusts but those advantages usually apply to specific groups:
1) Asset protection for persons with significant wealth such as celebrities, doctors, athletes and others vulnerable to high dollar value lawsuits.
b) Elderly persons may transfer their property to an irrevocable trust prior to applying for federal aid. Recent changes in the law require that property be placed in the trust for at least 5 years prior to filing for certain benefits. An irrevocable trust can also shield assets prior to entering a nursing home and reduce the cost of the stay.
c) Courts use irrevocable trusts for property settlements due to divorce, especially when children are potential beneficiaries.
d) Persons developing an estate plan with federal estate tax avoidance as a primary goal. Property in an irrevocable trust cannot be taxed upon the grantor's death because he/she no longer owns the property. This is not the best way to reduce estate taxes unless the property appreciates significantly in value. The reason is that the property transferred to an irrevocable trust is treated as a gift and is subject to gift tax upon transfer. The gift tax rate is comparable to the estate tax rate.
Most of the remaining trust are distinguishable by title. NUPP Legal only offers revocable living trust to the general public and thus we will only list some of the more common types of trusts not yet mentioned:
Asset Protection Trusts
Credit Shelter Trusts
Charitable Split-Interest Trusts
Charitable Lead Trusts
Generation Skipping Trusts
Grantor Retained Income Trusts ("GRIT")
Life Insurance Trusts
Qualified Personal Residence Trusts ("QPRT")
Qualified Terminable Interest Property Trusts ("QTIP Trust")
Special Needs Trusts