The Different Types of Trusts

A majority of people have heard of “establishing a trust,” yet few actually understand just what the phrase means. A trust is a fiduciary arrangement that allows a “trustmaker” or “testator” to appoint a third party, or the “trustee,” to hold assets on behalf of a “beneficiary” or “beneficiaries.” The trustee is the one who holds title to the trust property, and the beneficiary is the person who receives the benefits of the trust. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries. Below you can find the most common types of trusts.

Living Trusts

A living trust is a trust that is created by the “trustmaker” during his or her life, and immediately becomes effective.

Testamentary Trusts

A testamentary trust is created by the “testator” during his or her life, yet does not become effective until after death.

Revocable Trusts

A revocable trust is one that is created during the life of the trustmaker (the person creating the trust) and can be altered, changed, modified or revoked entirely. The trustmaker can transfer assets into the revocable trust and has the ability to remove the asset at any time during his or her life and can alter the beneficiaries or trustees. The trustmaker retains ownership and control of all assets transferred into the trust, and therefore serves as the trust’s trustee.

Irrevocable Trusts

An irrevocable trust is one which cannot be altered, changed, modified or revoked after its creation. Once the trustmaker has transferred an asset into an irrevocable trust, no one including the trustmaker can take the asset out of the trust. The trustmaker thus does not retain any ownership or control of the assets once they have entered the trust. The trustmaker is not the trustee as in a revocable trust, and instead appoints a third party as trustee.

Asset Protection Trust

An asset protection trust is established to protect a person’s assets from claims of future creditors. These trusts are normally structured so that they are irrevocable for a term of years and so that the trustmaker is not a current beneficiary. An asset protection trust is normally structured so that the undistributed assets of the trust are returned to the trustmaker upon termination of the trust provided there is no current risk of creditor attack, thus permitting the trustmaker to regain complete control over the formerly protected assets.

Charitable Trust

Charitable trusts are trusts established to benefit a particular charity or the public in general.

Constructive Trust

A Constructive Trust is an implied trust. An implied trust is established by a court and is determined from certain facts and circumstances. The court may decide that, even though there was never a formal declaration of a trust, there was an intention on the part of the asset owner that the asset be used for a particular purpose or go to a particular person. While a person may take legal title to an asset, equitable considerations sometimes require that the equitable title of such assets really belongs to someone else.

Special Needs Trust

A special needs trust is one which is set up for a person who receives government benefits so as not to disqualify the beneficiary from such government benefits. Ordinarily, when a person is receiving government benefits, an inheritance or receipt of a gift could reduce or eliminate the person’s eligibility for such benefits. Establishing a trust, which provides for luxuries or other benefits which otherwise could not be obtained by the beneficiary, the beneficiary can obtain the benefits from the trust without defeating his or her eligibility for government benefits.

Establishing the right trust is crucial in making sure that your assets, beneficiaries, and trustees are all chosen in order to maximize desired results. Choosing the wrong type of trust can have detrimental effects. We highly recommend the advice of an attorney when creating a trust. If you have any questions about the process of forming a trust, please feel free to contact Aziz Legal by phone or email at (408) 203-4627 or abid@azizlegal.com.

This article is merely informational and is not intended to be used as legal advice. Use of any information from this article is for general information only and does not represent personal legal or tax advice, either express or implied. Readers are encouraged to consult Aziz Legal, or another attorney, for any specific legal matters.