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A Guide to Trust Types

We are all familiar with trusts, usually in relation to someone who is a beneficiary of one. Some believe that trusts are only for the wealthy, but they are common and useful tools for creating estate plans of all sizes. Assets are managed and protected, distributions are controlled, and family legacies are perpetuated.

Types of Trusts

There are many types of trusts, but they all establish a financial arrangement between three parties: the trustor(s), the trustee(s), and the beneficiary(ies). The person creating the trust is known as the trustor, grantor, or trustmaker. Trusts can be created by more than one person or entity. The trustee manages the trust and disperses income or principal from the trust according to specific terms. The trust is for the benefit of one or more beneficiaries, which can be people or entities, such as charities.

Benefits of Trusts

Trusts provide many benefits. One of the key benefits is transferring assets from the owner to the trust fund, so assets do not have to go through a probate court before reaching the beneficiary. This allows the beneficiary to receive the assets faster and privately. Probate proceedings can last for months, unnecessarily delaying the dispersal of assets. Since court records can be viewed by the public, assets become public knowledge.

A person can establish a trust that they benefit from during their lifetime. Trusts can also be used to hold and disperse assets to beneficiaries who are minors, disabled, or otherwise unable to manage the assets. Some trusts are used to remove countable assets from a person who is planning to apply for Medicaid benefits. Assets intended for heirs may prevent them from qualifying for Medicaid coverage. Trusts created for this purpose are usually established at least five years before the trustor plans to apply for Medicaid.

Since estate taxes and gift taxes can eat into the number of assets a beneficiary receives, trusts provide a way to avoid or lessen these taxes. Trusts can protect assets from creditors, legal claims, and family disputes regarding how your assets should be dispersed. You may have additional reasons to create a trust for your assets.

Types of Trusts

The most common types of trusts are living, testamentary, revocable, and irrevocable. They can be funded during or after the trustor’s life, depending on the purpose of the trust. These common trusts are described as follows:

Living Trust

A living trust is set up while the trustor is still alive. The assets that are held in the living trust are available to the trustor during their lifetime. This type of trust is helpful if the trustor wants to have access to the assets but wants to give clear direction on how they will be distributed after death.

Testamentary Trust

A testamentary trust is often created by an executor of a deceased estate and is set up to benefit the trustor’s descendants. This type of trust is irrevocable and cannot be changed once it created.

Revocable Trust

Similar to a living trust, a revocable trust is created while the trustor is still alive and wishes to continue to benefit from the assets that the trust will hold. Often the trustor, trustee, and beneficiary are the same person while that person is still alive. After the trustor dies, a successor trustee assumes management of the trust for the benefit of the beneficiaries designated in the trust. The trustor can change or terminate a revocable trust while they are still alive.   

Irrevocable Trust

An irrevocable trust cannot be changed or terminated during the trustor’s lifetime. Since the assets held in an irrevocable trust are off limits to the trustor, this type of trust helps protect assets from creditors and taxes. It is often used when planning for Medicaid or government benefits. It may also be used to limit access to minors and adults with special needs to distribute funds at specific times or over their lifespan.

Trusts help individuals and businesses protect and direct their assets to beneficiaries while keeping those assets out of probate court. An experienced estate planning attorney can help you create the trust, or trusts, that will best suit your family’s needs and financial goals.

This article offers a summary of aspects of estate planning law. It is not legal advice, and it does not create an attorney-client relationship. For legal advice, you should contact an estate planning attorney. We hope you found this article helpful. If you have questions or would like to discuss your personal situation, please contact our Albuquerque office at (505) 830-0202.

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