There are many different types of trusts that may be used for different goals. Before we cover the main 3 types of trusts, it’s important to cover some basic terminology that is used in any type of trust:
- A Trust is a contract between a Trustmaker, a Trustee, and the Beneficiaries.
- The Trustmaker (also sometimes referred to as the grantor, donor, or settlor) is the person who creates the trust instructions and transfers property to the trust.
- The Trustee is the person who administers the trust according to the instructions provided in the trust document.
- The Beneficiary is the person or entity who benefits from or will benefit from, the Trust.
There may be more than one Trustmaker, Trustee, or Beneficiary of a Trust and the same individual may serve in more than one role. For example, the Trustmaker may also appoint himself or herself as the initial Trustee of the Trust.
Trusts can be used for a variety of purposes, such as:
- Directing how you want your assets managed in case of incapacity.
- Avoiding probate.
- Allowing someone else to manage the money for a young or irresponsible beneficiary.
- Managing a shared asset, like a family vacation home.
- Protecting your assets from a beneficiary’s reckless spending.
- Protecting your assets from future lawsuits, creditors, or divorce.
Trusts are not one-size-fits-all. Trusts must be customized to carry out the individual Trustmaker’s wishes. The type of trust that is best suited for you will depend upon your personal planning goals.
1. Testamentary Trust
The term “Testamentary Trust” is generally used to refer to a Trust that is written into a Will and does not take effect until after the Trustmaker dies. For example, if you have minor children, you might specify in your will that if your children are still below age 25 when you die, the assets of your estate should be held in trust for your children. You can amend or revoke a Testamentary Trust by changing your Will. However, after your death, a Testamentary Trust usually becomes irrevocable (see below).
Our Heir Safeguard Testamentary Trusts are a popular tool for leaving assets to beneficiaries protected from future lawsuits, creditors, or divorce.
2. Revocable Living Trust
A Living Trust is a Trust established by the Trustmaker that becomes effective while the Trustmaker is living. A Revocable Living Trust is a Living Trust in which the Trustmaker has retained the power to modify or revoke the Trust at any time. This means that if the Trustmaker originally included a beneficiary they now want to remove, they have the power to do that.
Revocable Living Trusts are a common estate planning tool for avoiding probate. A Revocable Living Trust may also provide several other benefits, such as leaving things to your beneficiaries protected in the event that your spouse remarries or protecting your beneficiaries from future lawsuits, creditors, or divorce.
3. Irrevocable Trust
Many people think that an Irrevocable Trust is a trust that cannot be changed or modified, but this is wrong. An Irrevocable Trust is a trust that contains at least one provision that the Trustmaker does not have the power to modify by himself. It’s possible that the Trustmaker may have retained several powers, including the possibility to change the beneficiaries. However, the Irrevocable Trust must have been properly drafted to allow for a change in beneficiaries.
As stated above, a Testamentary Trust generally becomes irrevocable after the Trustmaker’s death. In certain circumstances, an Irrevocable Trust may still be modified by court order or by following specific provisions under the Uniform Trust Code. Such irrevocable trusts are a popular tool for leaving assets to a beneficiary protected from financial immaturity or irresponsibility or future lawsuits, creditors, or divorce.
An Irrevocable Living Trust refers to an Irrevocable Trust created while the Trustmaker is living. The most common reasons for using an Irrevocable Living Trust include asset protection and tax planning.
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