A trust, as a legal agreement to have an estate managed by other parties, are created for various purposes and function differently based up on the intentions of the creator of the trust known as the settler or grantor. A trust instrument, the legal document that creates the trust, specifies the terms of the trust and how it is to be managed by the parties appointed by the grantor. The two main categories of trusts are living trusts and testamentary trusts. All other types of trusts are separated into those two categories.
Living Trusts
An “inter vivos” trust, or living trust, is any trust that is drafted while the grantor is alive. These trusts allow the grantor to appoint specific trustees and beneficiaries without a court dispute influencing the administration of the trust. The court process that would influence the trust, if the trust was not a living trust, is known as Probate. Many living trusts are drafted simply to avoid Probate proceedings and ensure that the trust is managed as intended.
These trusts are more expensive than the creation of a Last Will and Testament or a testamentary trust as the cost for the trust instrument, the legal document that establishes the trust, must be paid upfront by the grantor. Any living trust that is of a substantial amount can list a financial institution as a trustee and manage the trust alongside of the grantor.
Irrevocable Trusts Irrevocable trusts are typically created to protect assets from legal action and court settlements. By having the property managed by a trustee, the grantor gifts that property away from their ownership. Some senior citizens create these trusts so that they can receive nursing home care at a reduced rate by putting part of their estate and income into the trust. This lowers the overall net worth of the elderly person and allows them to receive subsidized care.
Revocable Trusts
A trust that is able to be altered or terminated is known as a revocable trust. The majority of revocable trusts are living trusts where the grantor is a listed trustee. This gives the grantor the power to make changes to the trust for a number of reasons. The grantor may want to add assets to the trust during his or her lifetime, add or remove trustees, or add or remove beneficiaries to receive the estate in the trust. Revocable trusts may be created with little value in the trust so that the grantor can later add monies or properties to the trust.
These trusts are subject to federal taxes because the grantor still owns and manages the property in the trust. However, these trusts, as living trusts, avoid the proceedings of Probate and avoid court costs that would be incurred.
Charitable Trusts
A charitable trust is any trust that designates assets to be donated to a charitable organization. These trusts come in a variety of formats and, because of their contribution to charitable organizations, often receive tax deductions on the percentage of assets to be donated. The majority of charitable trusts created divide the amount of the estate so that an annual percentage is given to a charitable organization and the remaining assets are given to noted beneficiaries.
In order for a valid charitable trust to be established, it must be an irrevocable trust to ensure that the grantor will not rescind or amend the trust. In this way, the trust is considered a gift to the charitable organization. These trusts may be generated as either living trusts or testamentary trusts.
Offshore Trusts
Any trust that is established in region that is not where the trust’s grantor lives is consider to be an offshore trust. While the trust does not necessarily have to be in a different country, many offshore trusts are created in other countries due to certain financial benefits. These trusts are often free from taxes such as the federal estate tax. Offshore regions are considered to be “tax havens” or low tax zones while “onshore” regions are considered high tax zones.
Other restrictions placed on “onshore” trusts are also typically lifted by the foreign financial centers or trust companies permitting the creation of the trust. These restrictions include limitations on time for a trust to be executed, payment for court settlements, and providing assets for specific beneficiaries when become of adult age to manage equitable assets.
Constructive Trusts Another way that a constructive trust operates is through a mortgage if, for instance, the stolen monies were used to purchase a house. The mortgage is used to repay the amount of the funds lost to the plaintiff. Constructive trusts, despite the court’s ruling, are able to be defended against through certain equity law doctrines. These doctrines may protect the defendant from having to turn over property, repay funds, or from entering into a constructive trust completely.
Testamentary Trusts
Testamentary trusts are any trusts that are established through a grantor’s Last Will and Testament. These trusts are by nature irrevocable at the time of death of the grantor, however, any provisions made are subject to the ruling of Probate. Through the Probate process, a judge may rule that a term of the trust or the trust as a whole is invalid thus rendering the trust ineffective. Many people create testamentary trusts as they have a low cost to initiate as they are paid for through the creation of a will and that they allow for any additional net income to be contributed to the assets of the trust.
After the Probate process has been completed, the trustee(s) appointed by the trust will then distribute the assets to listed beneficiaries. Although the grantor chooses the trustee(s), the Probate proceedings may appoint a different trustee if it deems the current trustee(s) is unfit to manage the trust’s assets.
