Revocable vs. Irrevocable Trusts
A revocable trust is a trust that can be changed, amended, or revoked at any time by the grantor during his or her lifetime. Most living trusts are revocable. An irrevocable trust is a trust which the maker cannot change, modify or revoke. The maker generally will have no control over the assets in the trust. An irrevocable trust can be beneficial in certain situations, but you should not put your assets into an irrevocable trust without first consulting an attorney.
Common Types of Trusts
- Living Trust - Made while alive and goes into effect immediately upon signing. If the maker is also the trustee and the beneficiary, he or she can do whatever they want with the property in his or her trust during their lifetime. If the maker becomes incapacitated, the backup or successor trustee can use the assets in the trust for the maker’s care. Upon the death of the maker, the living trust then operates like a will. The successor trustee distributes or retains the trust assets as the maker has directed in the trust without the involvement of the probate court.
- Testamentary Trust - Created as part of your last will and testament. It goes into effect after the maker is deceased. The probate court appoints the trustee named in the will, who holds and uses the trust assets for the beneficiary(ies) according to the instructions provided in the last will and testament. The probate court supervises the administration of the testamentary trust until it terminates.
Grantor Trust (also called a first-party trust or self-funded trust) - A trust in which the grantor of the trust is also the sole beneficiary of the trust. Most living trusts are grantor trusts.- Third-Party Trust - A trust established with the assets of someone other than the trust beneficiary (or his or her spouse). For example, a grandparent can establish a third-party trust using his or her assets with a grandchild as the beneficiary. The funds in a third-party trust can be protected from the trust beneficiary’s creditors.
- Education Trust - Often created by a grandparent, aunt/uncle, or other family member to assist in paying for his or her grandchild/niece/nephew’s education.
- Support Trust - Directs the trustee to use the trust assets for the beneficiary’s care, maintenance, support, and education. Parents often set up support trusts for their young children and direct that the assets be distributed outright to the children when they reach the age of 25 or older.
- Special Needs Trust - Meets certain statutory and regulatory requirements that will enable the beneficiary with a disability, or special needs, to remain eligible to receive SSI, Medicaid and other government benefits while still having access to the trust assets to supplement the beneficiary’s needs.
- Discretionary Trust - A very flexible trust which allows the trustee to distribute the trust assets as the trustee sees fit in his or her sole discretion. The trustee has full discretion as to the time, purpose, and amount of all distributions, and the beneficiary has no control over the trust. A discretionary trust is often set up for a beneficiary that has an addiction, spending problems, is in a problematic relationship, is immature, or is receiving government benefits.
- Spendthrift Trust (or a trust that contains a spendthrift clause) - Generally prohibits both involuntary and voluntary transfers of the trust beneficiary’s interest in the trust income or principal. This means that the trust beneficiary’s creditors must wait until the trust pays out money to the trust beneficiary before they can attempt to claim it to satisfy debts. It also prohibits the trust beneficiary from selling his or her right to receive payments to a third party for a lump sum.
- Charitable Trust - Supports the grantor’s charitable purposes and can be used to reduce estate taxes.
- Spousal Trust - Beneficial in a second marriage situation where the grantor wishes to take care of the new spouse, but upon the new spouse’s death, wants the remaining assets to go his or her children or beneficiaries rather than the new spouse’s children/ beneficiaries.
- Insurance Trust - Typically an irrevocable trust that is created to save estate taxes. The trust assets fund a life insurance policy that benefits the grantor’s beneficiaries.
- Generation-Skipping Trust or Dynasty Trust - Created by individuals with substantial wealth to save estate taxes and control the distribution of wealth over several generations of descendants.
