A trust is an agreement in which title to the assets are held by one person (called the “trustee”) at the request of another (called the “trustor” or “settlor” or “grantor”) for the benefit of a third person (the “beneficiary”). If a trust is funded during a persons lifetime for the benefit of that same person, it is referred to as an “inter vivos” trust. If a trust is funded as the result of a person’s death, it is called is a testamentary trust.
Revocable Living Trusts
A revocable living trust is established and funded during the trustor’s lifetime. A trustor’s assets are placed into the trust for his or her benefit, until his or her death.
A revocable trust is one which the trustor retains the right to change the terms during his or her lifetime or to revoke the trust in its entirety. Since assets in the revocable trust may be reclaimed by the trustor during his or her lifetime, a revocable trust is considered a part of the trustor’s estate. Therefore, the trust uses the trustor’s social security number as the taxpayer ID number and no separate income tax returns are required during the person’s lifetime.
Upon the trustor’s death, the trust assets are distributed to the beneficiaries designated in the trust instrument.
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A testamentary trust is funded after the death of a person. These trusts are usually provided for in an individual’s last will and testament. Unlike a living trust, testamentary trusts do not avoid probate.
Unlike a revocable trust, an irrevocable trust cannot be altered or revoked once it is created. This trust effectively removes any ownership rights the trustor has in the assets placed in the trust.
An irrevocable trust must file a tax return and uses an employer identification number.
Unlike a revocable trust, assets transferred to an irrevocable trust are not considered part of the trustor’s estate. Instead, the ownership rights are removed from the trustor, providing protection for the assets against creditors.
Special Needs Trusts
A special needs trust is one for the benefit of a beneficiary with “special needs.” The common definition of special needs is a beneficiary with physical or mental impairments, to the extent that such person is receiving governmental assistance.
First Party Special Needs Trust. This is a trust that is established after a person becomes disabled, for his or her own assets. Upon his or her death, the government will have a claim against any remaining assets. The benefit of a first party special needs trust is that the assets of the trust will not disqualify the person for medical or housing benefits during his or her lifetime.
Third Party Special Needs Trust. Unlike a first party special needs trust, person other than the disabled person establishes a trust for the benefit of the person with special needs. In this case, no government has a claim against the remaining assets after the death of the person with special needs. Typically a parent, grandparent, or other relative establishes a third party special needs trust.
An insurance trust is an irrevocable trust with asset consisting of one or more life insurance policies. Since the trust is the entity that owns the life insurance policy, the death benefit received will not be a part of the insured’s estate, and will not be taxed for estate or inheritance taxes.
A charitable trust is one entirely devoted to benefit a specific charity, charities, or the general public for the purposes defined in IRS Code § 501(c)(3). This type of trust is treated the same as any other charity, its founders have merely chosen for the charity to be formed as a trust instead of a non-profit corporation.
A charitable split-interest trust benefits BOTH individuals and charities. There are two types of charitable split-interest trusts, charitable remainder trusts and charitable lead trusts.
A charitable remainder trust is one that pays the individual beneficiaries first and charity second. A charitable remainder trust will pay one or more persons a set amount each year (expressed as a percentage of the trust assets or as a set dollar amount). The individual beneficiary’s interest in the trust may last for his or her lifetime or for a term of years. After the person’s death or the end of the term of years, the charity or charities designated in the trust will receive the remaining assets in the trust.
A charitable lead trust is the opposite of a charitable remainder trust, it pays the charities first and the individual beneficiaries second. Charity receives an amount each year for a term of years, and at the end of the trust term, the assets remaining in the trust are distributed to the non-charitable beneficiary or beneficiaries.