There are as many different types of trusts that may be used for different goals. First, let’s cover some basic terminology:
- A Trust is a contract between a Trustmaker, a Trustee, and the Beneficiaries.
- The Trustmaker (or grantor or 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 terms of the trust document created by the Trustmaker for the benefit of the Beneficiary.
- The Beneficiary is the person or entity who benefits from, or will benefit from, the trust.
- There may be more than one grantor, trustee, and beneficiary of a trust.
A trust may be created for almost any lawful purpose. A common reason for creating a trust is to provide for and protect someone. A property owner may want to convey property in trust to a minor, to an individual who lacks the skills necessary to manage property, to an individual who is prone to use the property in an excessive or frivolous manner, or to an individual who is susceptible to influence from others.
Trusts are not one-size-fits-all. Trusts must be customized to carry out the individual Trustmaker’s wishes. Here is an overview of the types of trusts to consider:
Testamentary trust: Created within a last will and testament, a testamentary trust does not take effect until the death of the testator (the person who created the will). A testamentary trust can be amended or revoked by updating the will. For example, a will might include a testamentary trust for your minor children specifying at what age the children will have direct access to the funds and who will manage them while the children are still below that age.
Revocable Living Trust: A trust that can be amended or terminated by the Trustmaker during the Trustmaker’s life. Assets that are titled to a trust do not have to go through Probate upon your death, thus Revocable Living Trusts are a common estate planning tool for avoiding probate. A Revocable Living Trust may also leave things to your beneficiaries protected in the event that your spouse remarries, and it may protect your beneficiaries from future lawsuits, creditors, or divorce.
Irrevocable Living Trust: A trust that may not be amended or terminated after it is created—or at the very least, some part of the trust terms cannot be amended or terminated. In some Irrevocable Living Trusts, the Trustmaker may have retained some limited powers, such as the power to change who the final beneficiaries of the trust will be when the Trustmaker dies or the power to change the Trustee. In addition, many states, including North Carolina, have adopted some version of the Uniform Trust Code which may allow an Irrevocable Living Trust to be modified or terminated upon the consent of the Trustmaker and beneficiaries of the trust. Irrevocable trusts may be used for a variety of purposes, including asset protection planning, long-term care planning, or tax planning.
Additional Estate Planning Information--Learning the Most Common Mistakes:
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