The Different Types of Trusts
If your loved one decides to create an estate plan utilizing a trust, you may be appointed a successor or co-trustee of the trust. It is essential to understand your duties and responsibilities as a trustee. In addition, as a trustee or beneficiary, you also want to know what type of trust you may be working with because it can affect your inheritance. There are many different types of trusts, each with its characteristics. Keep on reading to learn more about the different types of trusts.
Ten Common Types of Trusts You Should Know:
What are some of the more common types of trusts you may encounter? The following is an overview:
An important characteristic that sets testamentary trusts apart from other trusts is that they are set up through your loved one’s will and are established after they pass away. Therefore, your duties as a trustee will only arise after your loved one has passed, versus a living trust, where your obligations could be triggered even while your loved one is still alive.
A conduit trust is a plan for retirement assets. It has a single individual as a primary beneficiary. Instead of using the original owner’s life expectancy, the primary beneficiary’s life expectancy determines the minimum required distributions. The trustee passes the minimum required distribution directly to the beneficiary. The remainder beneficiary can be anyone or anything. That includes charities.
An accumulation trust is the second kind of trust for retirement assets. It is defined as any trust that is not a conduit. With an accumulation trust, the trustee is not required to distribute withdrawals from the retirement account immediately. Instead, the trustee may hold the withdrawals in a trust. As a result, the trust receives asset protection and minimal taxes. The oldest beneficiary’s life expectancy is used to calculate the minimum required distributions for all the beneficiaries.
Revocable or Living Trusts
Perhaps the most common type of trust, these trusts are created and established during your loved one’s lifetime. During your loved one’s lifetime, they retain control of the trust’s assets and are free to revoke or change its terms at any time. After your loved one has passed, you become the acting successor trustee. Your duties as trustee will either begin at the outset if you are named a co-trustee or can be triggered if your loved one becomes incapacitated.
Suppose you are the trustee of a revocable trust. Revocable or living trusts become irrevocable after your loved one passes away. In that case, it is crucial to understand that your loved one no longer owns or controls the assets in the trust and cannot make changes to the trust’s terms without the beneficiaries’ consent.
Credit Shelter Trusts
Trustees of credit shelter trusts have essential duties, including ensuring proper tax elections and allocations after your loved one dies. These trusts are used to reduce estate taxes. During your loved one’s lifetime, he creates this trust to shelter a certain amount of his estate from estate taxes while giving the remainder to a separate trust share without incurring any tax.
A Generation-Skipping Trust may also be known as a dynasty trust. This trust transfers substantial amounts of money tax-free to beneficiaries at least two generations below your loved one’s age. If you are a trustee of this type of trust, it is vital to work closely with a good certified public accountant.
Qualified Personal Residence Trusts
Another type of trust that you might find yourself in charge of administering is a qualified personal residence trust. This trust removes the value of your loved one’s home or vacation house from their estate.
Irrevocable Life Insurance Trusts
Yet another type of trust designed to minimize estate taxes is an irrevocable life insurance trust. An irrevocable life insurance trust removes life insurance proceeds from your loved one’s estate. The funds are often used to help pay the costs of the estate when it is time to administer the trust, including funeral expenses, estate tax bills, and other administration costs.
Qualified Terminable Interest Property Trusts
In today’s world, many families are “blended.” Divorces, remarriages, and stepchildren may all be part of the dynamic. In these cases, qualified terminable interest trusts are sometimes used to direct assets. Qualified terminable interest trust can lead investments to particular relatives after the death of your loved one’s spouse passes away. While the spouse is alive, they may be entitled to receive income from the trust. Conversely, these trusts are more complex than essential revocable trusts. Therefore, it is vital to seek assistance from an experienced attorney during the administration process.
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