Trust documents can come with many different names, but there are essential two types of trust those that can be changed by the grantor “Revocable” and those that are intended to be permanent “Irrevocable”. Below are some of the common trust types.
Revocable Living Trust
Revocable trust is a trust that can be modified or revoked by the settler. In such trusts, the settlor reserves the right to terminate the trust and recover the trust property and any undistributed income. Revocable trusts are considered grantor trusts and therefore the income is taxed to the settlor and the assets in the trust at the time of settlors death are included in the settlors taxable estate.
Irrevocable trust is a trust that cannot be modified or terminated without the permission of the beneficiary. In most states, a trust will be deemed irrevocable unless the grantor specifies otherwise. Once the grantor has transferred assets into the trust, s/he has no rights of ownership to the assets and the trust. Irrevocable trusts are preferred because it removes all incidents of ownership, thereby effectively removing the trust’s assets from the grantor’s taxable estate. The grantor is also relieved of the tax liability on the income generated by the assets. This is the opposite of a “revocable trust”, which allows the grantor to modify the trust.
A testamentary trust is a legal entity created as specified in a person’s will which takes effect when the settlor dies. It is a trust created by the terms of a will. Testamentary trusts are mostly created to protect minor children or a relative with disabilities who will inherit large sums of money disbursed at the person’s death. Usually trustees are appointed in the will to direct the trust until a set time when the trust expires, like when minor beneficiaries reach a specified age or achieve a specified matrimonial status. Depending upon the number of years for which the trustee must act for a testamentary trust, s/he will need to go to probate court and have the trust regularly checked over by the courts.
Special Needs Trust and Charitable Trust
These trusts are created to accomplish specific goals of the grantor such as providing for disabled family members or making charitable contributions for specific purposes.
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