Types of Trusts
Trusts can play an important role in the estate planning process, with many types each suited to various client situations and goals. While it is best to work with an estate planning attorney, having a basic understanding of the most common types can help you start the conversation with your clients:
Living Trust
AKA Revocable Trust
- Client can retain control of assets during lifetime, changing or revoking trust if needed; offers flexibility
- Client can serve as trustee
- Assets can go to beneficiaries without having to go through probate; allows greater privacy than a will
Irrevocable Trust
- Once established, cannot be changed or modified; less flexibility
- Assets transferred in cannot be transferred out
- Client cannot serve as trustee
- Can remove assets from the estate, sheltering them from estate and gift tax; may be appealing to help minimize tax liability on large estates
- May protect assets from creditor, beneficiary, or even Medicaid claims
Testamentary Trust
AKA Will Trust or Trust Under Will
- Created inside of a will and does not take effect until client’s passing
- Client can retain control of assets during lifetime – assets are not transferred until client’s death
- Changes can be made up until client’s death, at which point it becomes an irrevocable trust
- Goes through probate, sacrificing some of the privacy protection other trusts can offer
Marital Trust
AKA A Trust
- Funded after the first spouse passes away; assets beyond the estate exemption amount are transferred to the Marital Trust
- Assets, along with any income, are passed on to surviving spouse; surviving spouse’s beneficiaries are responsible for paying estate taxes on amount above surviving spouse’s estate tax exclusion
- Assets can go to beneficiaries without having to go through probate
- Typically paired with a Credit Shelter Trust (aka Bypass Trust, Family Trust, or B Trust)
- Since assets within the Marital Trust are included in the estate, they receive a step-up in cost basis at surviving spouse’s death
Credit Shelter Trust
AKA Bypass Trust, Family Trust or B Trust
- Funded after the first spouse passes away
- Allows the deceased spouse to use their estate exemption amount to provide income to the surviving spouse during their lifetime, then pass assets to beneficiaries with no estate taxes due
- Typically paired with a Martial Trust (aka A Trust)
- Since assets within the CST are not part of the surviving spouse’s estate, there is no 2nd step-up in cost basis at their death
Did you know?
Today, “portability” allows a surviving spouse to use a deceased spouse’s unused estate tax exclusion without the use of a trust. Portability provisions were made permanent as part of the American Taxpayer Relief Act of 2012. There may still be reasons to utilize Credit Shelter Trusts, but due to portability, they are now less desirable than they once were.
Charitable Lead Trust
- Provides income to a designated charity, with remainder going to beneficiaries
- Trust receives charitable deduction of amounts paid to charity (applies to non-grantor trust, which is most common)
Charitable Remainder Trust
- Allows client to receive income from their assets, with any remaining assets or income going to a designated charity
- Immediate tax deductions can be claimed for assets contributed to trust
Generation-Skipping Trust
- Assets pass to grandchildren rather than children; children avoid estate taxes
- Children could still be given the option to access income
Irrevocable Life Insurance Trust
- Specifically designated to own life insurance policies
- Removes life insurance death benefit from client’s estate, avoiding estate tax on the insurance proceeds at their passing
- Protects insurance payouts from creditors
Special-Needs Trust
- Funded to create additional financial support for beneficiaries with disabilities, without compromising their eligibility for government assistance
Spendthrift Trust
- Allows specification of how and when the principal can be accessed by the beneficiary(ies)
- Generally used when a beneficiary is young or has been financially irresponsible in the past
- Assets are protected from creditors
Choosing the right trust to use, if any, can significantly impact the future of a client’s estate and the well-being of their beneficiaries. Please Note: Vicus Capital cannot provide legal or tax advice.
Vicus Capital is neither a law firm nor a certified public accounting firm and no portion of the content should be construed as offering or disseminating specific legal or accounting/tax advice.
For Use with the General Public. Financial Planning and Advisory Services offered through Vicus Capital, Inc., a federally Registered Investment Advisor.
