Testamentary trusts are just one type of trust and if you are actively working on your estate plan, it’s important to know what your trust options are. Today we’re going to cover what you need to know.
Testamentary Trusts and Other Types of Trusts You Should Know
A testamentary trust is also referred to as a will trust and it is a trust established in accordance with instructions written in a last will and testament.
It is permissible for someone to incorporate multiple testamentary trusts in their last will and testament.
The testamentary trust is managed by a trustee who is named in the last will and testament and it is their job to manage and distribute the assets in the trust according to the directions left in the will.
Testamentary trusts are irrevocable – we will cover the definition of testamentary trusts shortly.
Revocable trusts are trusts that can have their terms altered or canceled completely with the approval of the grantor of the trust. Property included in a revocable trusts is transferred to beneficiaries of the trust once the trust grantor is deceased. However, if property in the trust generates income during the lifetime of the grantor, that income is paid to the grantor of the trust.
Irrevocable trusts are trusts in which the trust terms cannot be altered or canceled in any way with agreement of all of the trust named beneficiaries.
Essentially, when a grantor sets up an irrevocable trust, they transfer all of their ownership rights to property in the trust over to the trust.
Asset Protection Trusts
An asset protection trust is a trust that is set up with the intention of protecting assets of the grantor from any claims by creditors. In the case of asset protection trusts, the trustmaker may not be a beneficiary of the will. Most frequently when setting up this type of trust, the trust is an irrevocable trust for a set period of so many years.
When an asset protection trust is terminated, assets that have not been distributed are returned to the trustmaker, but only if there is no risk of creditors pursuing those assets.
A charitable trust is a type of trust that promises a donation to a specific charity. This type of trust is generally included in a last will and testament and it can serve as a financial planning opportunity for the creator of the trust.
Charitable trusts can be funded over a lifetime and when the trustmaker passes away, the funds in the trust are bequeathed to the charity named in the trust.
A constructive trust is an implied trust that is set up by the court system with consideration of certain circumstances and facts. For example, even though it may not be written in a will that Alice is to receive a certain asset from her grandmother’s estate, it may be otherwise implied that the grandmother wanted Alice to inherit that item through other evidence.
Special Needs Trusts
A special needs trust is a trust that is established for an individual with special needs who receives government benefits. Setting up a special needs trust ensures that the individual that the trust is intended for does not get disqualified for their government benefits. The funds in a special needs trust are designated as luxury funds that the individual may use for items that their government benefits would not cover.
It is very important for the wording of a special needs trust to be explicit so as not to interfere with any government benefits since this could cause financial disaster for the special needs individual. It is also not uncommon for this type of trust to incorporate a clause that terminates the trust in the event that it poses any threat of interfering with government benefits.
A spendthrift trust is a trust in which a trust is set up for a beneficiary, but the beneficiary is explicitly forbidden to sell any of the assets within that trust. The assets in a spendthrift trust are protected against claims from creditors. Once the assets within the trust are distributed to the beneficiaries of the trust, they are no longer protected against creditor claims.
Tax By-Pass Trusts
Tax by-pass trusts are trusts that allow for the passage of money from one spouse to the other while limiting the federal taxes that can be levied upon the death of the second spouse. This type of trust is beneficial because traditionally after the second spouse dies, the remaining assets that exceed the exempt limit are taxable and those taxes must be paid by the children of the spouses who inherit the remaining estate assets. This is not the case when the estate assets are in a tax by-pass trust as the assets are protected.
A totten trust is a trust that is established during the lifetime of the trust grantor. The grantor establishes the trust at a financial institution in their own name and names themselves as the trustee for the beneficiary of the account. The grantor then makes deposits into the account over their lifetime and upon their death, the contents of the account are payable to the beneficiary of the account.
Since the contents of a totten trust are not payable to the beneficiary until after the death of the grantor, this is a type of revocable trust.
This type of trust can be used for cash and securities, but it is not possible to use a totten trust for real estate property.
When setting up a totten trust, the account must include language that identifies it as a payable upon death account. For example, the account should be titled “Payable upon death to Mr. XYZ.”
Have Questions About Testamentary Trusts or Other Types of Trusts?
If you have questions about testamentary trusts or other types of trusts, it’s time to connect with an estate planning attorney. If you live in or around St Pete’s, Florida, Weidner Law can help, just call our office today at 727-954-8752.