A trust is basically a written contract that tells people what to do with your things and appoints someone (trustee) to follow those instructions. There are many different forms of trusts. They are usually divided into two categories, revocable, and irrevocable.
Revocable Trust– These are trusts that can be revoked. In other words, the trust can be changed, modified, terminated, or amended, usually by the people who setup the trust (in some cases referred to as trustor, settlor, or grantor). This allows the people who are putting assets into a trust to have control to be able to change the trust and who gets those assets during their lifetime if circumstances or their wishes change.
Inter-vivos revocable (living) trust– This is most commonly referred to as a “family trust.” It is basically a trust that can be revoked or changed at any time during the life (inter-vivos) of the person or people who set them up. This is the most common form of trust used in estate planning since it is very flexible and can be changed. The terms of the trust become certain and require action only upon death of the person or people who set up the trust. Many times these trusts become irrevocable trusts or create other irrevocable trusts for the beneficiary of the trust. The most common form would be a couple with a trust for their family assets that puts all assets into an irrevocable trust if they both died for the benefit of their kids, who may still be minors. The trustee would oversee distributions of the assets to the minor children to be sure the money isn’t wasted and applied properly. Although put into the trust, the assets are still controlled by the person who put them into the trust.
Irrevocable Trust– This is just the general category of trust that cannot be changed, amended, or revoked at any time after it is signed, even by the person who created the trust. There are some legal ways to revoke or amend a trust of this type, but require many steps to be taken to do this properly.
One of the biggest benefits of irrevocable trusts are their use in tax, gift, and asset protection planning. They can be used to make gifts during a person’s lifetime of an asset into a trust for a beneficiary to have the gift be effective now, but not be given to the person until a later time. For example, someone could put a home or large sum of money into an irrevocable trust that would only be distributed to their kids after a certain period of time, like when they reach the age of 25. Even though the gift would be effective now and could not be taken back, the kids wouldn’t have access to the asset until certain conditions are met.
There are many forms of these trusts and have many different uses, but the main drawback is the fact that once formed and assets are put into them, the trust terms cannot be changed and assets cannot be taken out, except in very limited circumstances. This makes them inflexible for general estate planning and are usually only for very specific cases or certain assets. Since they cannot be changed. you lose control over the assets and they are technically owned by the trust, which becomes a separate legal entity. This can prove very useful for asset protection purposes because they are then outside of the hands of any creditors. For example, if you put a rental home into an irrevocable trust for your kids benefit and you later get a judgment against you, the creditor could not come after that rental home since you no longer own it. It is the property of the trust.
Although there are many different forms, here are some of the other types of specific trusts:
Martial Deduction Trust- QTIP (Qualified Terminable Interest Property)- This trust is used to maximize the martial deduction and avoid estate taxes.
Charitable Remainder Trust–
Charitable Lead Trust–
Charitable Remainder Annuity Trust (CRAT)
Charitable Remainder Unitrust (CRUT)
Bypass Trust (Credit Shelter Trust)-
Generation-Skipping Trust (Dynasty Trust)-
Intentionally Defective Grantor Trust (IDGT)-
Grantor Retained Annuity Trust (GRAT)-
Grantor Retained Interest Trust (GRIT)-
Qualified Personal Residence Trust (QPRT)- Used to hold someone’s primary residence to protect it from creditors and still allow grantor to live in the house for a period of time, then transfer to beneficiary.
Domestic Asset Protection Trust– Sometimes called “Spendthrift Trust” or classified as discretionary trust, support trust, personal trust, or shifting trust
Offshore Asset Protection Trust- Non-US irrevocable trust
Irrevocable Life Insurance Trust (ILIT)- used to hold life insurance policy and proceeds to distribute upon death for estate, tax, and asset protection purposes.
Testamentary Trust– This is usually a trust that is created by a will upon death to hold certain assets and distribute them over time.