Understanding the Different Types of Trusts

Trust can provide a number of different financial advantages, from helping your beneficiaries to avoid probate to ensuring a specific family member receives financial support after you have passed away. However, not all trusts are the same. There are two main types of trust classifications. Let’s take a look.

Living trust: In a living trust, a grantor will create the trust while he or she is still alive and then transfer property to a trustee. A living trust will typically give the grantor the power to change or revoke the trust throughout his or her lifetime. However, when the grantor passes away, the trust is then rendered irrevocable. This means that the trustee must absolutely adhere to all the rules set forth in the trust governing the distribution of property, as well as all stipulations concerning the payment of both taxes and expenses.

Testamentary trust: Unlike a living trust, which is established while the grantor is still alive, a testamentary trust is created after a grantor has already passed away. These trusts will typically be created or set up as part of a will. Testamentary trusts can be particularly advantageous for long-term financial planning. For example, they are often used to protect the financial future of a spouse, ensure that a special-needs beneficiary will be taken care of in the long term, or to prevent minors from inheriting property before they are of legal age.

For each of these trust types, it is important to note that a trust may be funded or unfunded and revocable or irrevocable. A funded trust is either fully or completely funded by a grantor during his or her lifetime while an unfunded trust is simply a trust agreement (in other words, it doesn’t have any property in it). The trust may remain unfunded, or it may be funded once a grantor has passed away. A revocable trust may be altered during the grantor’s life, but an irrevocable trust cannot be altered. For example, most living trusts are deemed irrevocable once the grantor has passed away.

It is important to note that different kinds of trusts have different tax ramifications, especially if you are planning to set up any kind of overseas trust. If you are debating different types of trusts, it may be advantageous to consult a professional.