Types of Living Trust

By Thomas King

A trust is a legal instrument, created by a settlor, in which property is held by a trustee for the benefit of another party, known as the beneficiary. Trusts can be living -- effective during the settlor's lifetime; or testamentary -- part of the settlor's will and effective only after his death.

Revocable Trust

A revocable living trust is one in which the settlor reserves the right to revoke or modify the trust at any time. Note that a testamentary trust is always revocable during the settlor's lifetime. A revocable trust is commonly used as an estate-planning tool to avoid probate, the legal process for determining the validity of a will and distributing a decedent's assets. Probate can be expensive, time-consuming and complicated. A revocable trust typically avoids the probate process because once property is placed in a trust, it is no longer considered part of the settlor's estate.

Irrevocable Trust

An irrevocable living trust is a trust the settlor no longer has the authority to revoke or modify. The settlor has, in effect, given up her property. The inability to control your property is the clear disadvantage of an irrevocable trust. However, certain situations may warrant the use of such a trust. For example, an older person may transfer his property into an irrevocable trust before applying for Medicaid in order to satisfy certain property limitations. Another reason may be to avoid federal estate tax. Once the property is transferred into an irrevocable trust, the property is titled to the trust itself, not in the settlor's name; therefore, upon the settlor's death, the property is not subject to estate tax.

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Charitable Trust

A charitable trust is a trust that is established for the benefit of a charitable beneficiary. The laws governing charitable trusts differ from those governing non-charitable trusts. In general, charitable trusts enjoy benefits that non-charitable trusts do not. This includes tax breaks and the ability to have a perpetual existence. However, if the purpose of a charitable trust becomes impossible, the legal doctrine of cy-pres will operate to select another charitable purpose which is as close to the original charitable purpose as possible.

Miscellaneous Trusts

There are numerous trusts created to fit specific situations. For example, a spendthrift trust prevents beneficiaries from voluntarily or involuntary spending or pledging benefits before they are received. This means, in part, that creditors of the beneficiary cannot force the trustee to distribute trust property. A special needs trust is designed to prevent a beneficiary with a disability from losing access to essential government benefits, like Supplemental Security Income or Medicaid. A bypass trust transfers the settlor's assets to a spouse in a way that limits, or bypasses, certain taxes, such as the estate tax.

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Irrevocable Trust Estate Planning


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A Living Trust Explained

A living trust is a legal device that establishes how your property is to be transferred upon death, but goes into effect during your lifetime. The grantor, who puts his property into the trust, assigns a trustee to administer the trust on behalf of a beneficiary. There are several types of living trusts. In comparison, a testamentary trust is created by the terms of a will and does not go into effect until death. Living trusts avoid probate but testamentary trusts do not.

Trustee Not Paying Beneficiary

A trustee is a party who administers the assets of a trust and distributes them to beneficiaries in compliance with terms established by the trust grantor. Although the terms of a trust often allow a trustee considerable discretion with respect to the distribution of assets to beneficiaries, beneficiaries have legal options if the trustee's refusal to distribute trust assets appears to be unjustified.

What Is the Power of a Trustee in a Testamentary Trust?

In a testamentary trust, the trustee's function is to serve as guardian and manager of trust assets. The trust document will often describe specific powers granted to a trustee, but those powers may also be affected by state law.

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