Types of Trusts

Instructor: LeRon Haire
In this lesson, we will introduce four types of trusts, which are living, testamentary, credit-shelter, and disclaimer trusts. The lesson will describe characteristics of each, which will show how they differ from the others.

In Trusts We Trust

When people speak of the term trust, the first thought is likely about the definition that deals with the ability to depend on someone. However, there is a different type of trust, which we will go over in detail during this lesson. The trust that this lesson talks about can be defined as a type of agreement that details how a third party, known as a trustee, will handle assets on behalf of a beneficiary.

Let's now take a look at four types of trusts, which are living, testamentary, credit-shelter, and disclaimer trusts.

Living Trust

Simply stated, a living trust can be defined as a trust that is established while a person is living. Although a living trust is often commonplace in today's society, many individuals are unaware that this option exists. Here is an example of a living trust:

'Deborah is the grantor of a trust, meaning that she established a trust. This trust declares that she has transferred all real property in her interest to an appointed trustee, which is a person appointed to handle all estate and trust issues. The trustee has acknowledged obtaining the property and agrees to abide by trustee guidelines and hold the property in trust.'

It is also important to know that a living trust can be revocable or irrevocable. A revocable trust is one that allows a grantor the ability and rights to amend changes to the trust as needed as well as retain ownership of any properties in the trust.

An irrevocable trust is one in which terms can't be changed without the grantor's named beneficiary giving the okay. For example, a grantor could transfer ownership of property or properties to another individual. The grantor will no longer have the right to make changes in an irrevocable trust.

Testamentary Trust

Many living wills are maintained in county courthouses.

A testamentary trust is defined as a trust that is established when a person is living but is only effective once the person dies. Testamentary trusts are commonplace with wills. A will is a documented notation, typically written, that explains how the testator (person that creates the will) would like their properties handled after they have died. Here is an example of a lead sentence of a will:

'I, John Doe, hereby in this will, bequeath (leave) the following items and property to the following persons...'

Testamentary trusts can be revocable or irrevocable but with a slight twist: While the person is alive, it is revocable because the testator can make changes as needed while alive. However, the testamentary trust is irrevocable once the testator has passed away because after that time, any necessary changes would be made by a trustee.

Credit-shelter Trust

A credit-shelter trust is a type of trust that allows a person to avoid harsh tax penalties when leaving assets and estate properties to their spouses. This trust is specifically established to avoid the tax penalties by passing on the assets in the will to the designated beneficiaries, whom are usually children. The spouse, however, gets to keep the rights to the assets in the trust for the duration of the remaining spouse's lifetime.

The credit-shelter trust is important because estate taxes can be very 'taxing' (pun intended). One of the added benefits of these types of trusts is that no matter how much the trust grows for the remaining spouse, it is forever tax free.

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