Trusts are all very similar in nature whether they are created to protect assets, develop estate planning, or provide private benefits. However, trusts do not have to deal with the same type of property and they are not all created for the same purpose or in the same manner. There are many different types of trusts that can be created partly because of the wide variety of purposes and individual needs. A trust can be created by almost anyone and they have different time periods, and they may have any amount of money or property involved. Until recent years, trusts were limited to only the wealthiest; and used for the sole purpose of being able to pass their wealth on to the next generations in a private manner. Today, families can use trusts to protect the equity in a family home or some savings that have been accrued for retirement or college. This ensures that the assets are protected. Trusts are very flexible therefore it is beneficial to speak with a legal expert when developing a trust for any purpose. There are three basic ways to classify trusts: by its purpose, as living or testamentary, or as revocable or irrevocable.
Testamentary vs. Living Trusts
This is one of the most basic ways that trusts are classified and they have to do with whether the trust becomes effective while the grantor is living or only after his/her death. A “living trust” becomes effective while the grantor is still living. When a living trust has a trustee besides the grantor, it requires a “trust agreement” because both parties must completely agree on the terms of the trust. If the grantor is the trustee, it is just a “declaration of trust” since the grantor is the only one involved in the management of the trust. A testamentary trust is created under a Last Will and Testament. It can only become effective once the testator has died because it does not become active until the Last Will and Testament does. Even then it must be admitted to probate to become effective.
Irrevocable vs. Revocable Trusts
This is a basic classification of trusts as well. When a grantor chooses to reserve the right to revoke a trust after it has become effective, it is called a “revocable trust.” The grantor thereby reserves the right to change any of the provisions or terms of the trust. But if the grantor decides that they do not want to have the option of changing terms or conditions they will create an “irrevocable trust” that cannot be changed. It is important to note that these options are only available on living trusts. Once a testator or grantor has died, the trust will automatically become irrevocable since no further changes can be made. A revocable trust can be revoked, amended, terminated or changed in any way by the grantor. An irrevocable trust cannot be changed, terminated, amended or revoked by the grantor or any other person once it has become effective.
Classified by Purpose
Each trust that is created will have a specific purpose. A Family Savings Trust can be used to protect a family’s assets. It is oftentimes used to hold ownership interests in various entities until a specified time. It protects the family’s assets from lawsuits as well as business risks. A Dynasty Trust is a very popular strategy which can be used to minimize or avoid estate taxes. They are usually designed so that the needs of minor children are taken care of in the event that parents pass. These usually only last until the child is 21 or 25 years old and can manage the financial responsibilities. A trust is very flexible and in one way or another is used to protect assets. An attorney who is experienced and knowledgeable in the field can help individuals choose trust strategies that are appropriate for their personal and financial situation.