Trust Planning

Trust Planning

Estate Planning and Wealth Management

Trusts Defined and Explained

There are many different types of trusts. To show the diversity, we list trusts by purpose. This is by no means a complete list.

A/B Trust
can be either a living or testamentary trust, and is designed to reduce the estate tax liability of a married couple. This trust splits into two different trusts upon the death of the Grantor: the Credit Shelter Trust, otherwise known as the By-Pass Trust, and the Marital Trust. The Credit Shelter Trust is designed such that it holds as much property as is sheltered from the federal estate tax by the unified credit. The Marital Trust, the beneficiary of which is the Grantor’s spouse, is designed to hold the remainder of the Grantor’s property, which is sheltered from the estate tax by unlimited marital deduction.

Charitable Trusts
can be either a living or testamentary trust, this is a trust where one or more of the beneficiaries is a charitable organization. There are four different types: the charitable remainder annuity trust (CRAT), the charitable lead unitrust (CLUT), the charitable lead annuity trust (CLAT), and the charitable remainder unitrust (CRUT).

Charitable Split-Interest Trust
can be either a living or a testamentary trust, this is a trust that has both non-charitable and charitable beneficiaries.

Complex Trust
for income tax purposes, all trusts are classified as complex or simple trusts. All trusts that are not designated as simple trusts are designated as complex trusts.

Dynasty Trust
can be either a living or testamentary trust, this trust is designed to last longer than the time permitted by the Rule Against Perpetuities.

Grantor Trust
this is most often a revocable living trust, but it can be irrevocable in some circumstances, it is never testamentary. This is a trust where a person or entity other than the Grantor is treated as the “owner” of the trust for federal income tax purposes.

Grantor Retained Income Trusts “GRITs”
this is always an irrevocable living trust, and is designed to reduce, upon the Grantor’s death, the value of the Grantor’s personal residence for federal estate income tax purposes. The Grantor transfers his or her home into the trust.

Life Insurance Trust
must be an irrevocable trust, into which a life insurance policy has been transferred. If the policy has been transferred into the trust three years prior to the Grantor's death, the policy will not be included in taxable estate. Grantor must not be trustee of the trust or tax benefits lost.

Qualified Terminable Interest Property Trusts “QTIP Trusts”
can be either a living or a testamentary trust, this is a type of Marital Trust for use when a second spouse is involved. The Grantor transfers property into the trust for the benefit of the surviving spouse, estate tax free by virtue of the unlimited marital deduction, but also includes the Grantor’s children (including those from previous marriage) as remainder beneficiaries. This way, the Grantor ensures that the property is ultimately distributed to the Grantor’s children upon the surviving spouse’s death.

Simple Trust
to be classified as a simple trust, all of the following must be met: 1) the instrument that creates the trust must require that all income be distributed in the tax year in which it is earned; 2) the instrument that creates the trust must provide that no amounts are to be used for charitable purposes; and 3) the trust must not call for the distribution of any amounts that are allocated to the principal of the trust.

Special Needs Trust
can be a living or testamentary trust, this is a trust that is established for a person who is receiving government benefits. The purpose of this trust is to provide for the person’s needs without disqualifying that person from those government benefits. See also: Quick Guide to Special Needs Trusts, and More Resources on Special Needs Trusts.

Spendthrift Trust
can be either a living or testamentary trust, this trust gives the trustee latitude not to make a distribution to the trust beneficiary either when the distribution would go to a creditor, or when the trustee fears that the beneficiary would waste the distribution

Totten Trust
this is an informal trust created during the lifetime of the grantor, where the grantor deposits money into an account at a bank or other financial institution in the grantor’s name as trustee for another person. This is not considered to be a completed gift until either the grantor’s death or the happening of some other event that indisputably reflects the gift during the grantor’s lifetime.

For definitions of small terms, e.g. fiduciary, grantor, probate, unified credit,, etc, go to the trust and estate definitions page