A trust can be an invaluable asset if you are developing an estate plan or other special purposes.
The terminology associated with trusts, however, can be complicated and bewildering. If you feel confused or are just looking for an introduction to the world of trusts, the following primer may be useful to you.
What is a trust?
At its most basic level, a trust is nothing more than an arrangement whereby a trustee agrees to hold property for the benefit of another. Every type of trust – regardless of the legal variations – must have the same basic components:
- There must be someone who created the trust. This person is typically called the “grantor,” “donor,” ”settlor” or the “trustor.”
- There must be a person or entity who agrees to hold the money (or property) for the benefit of someone else. This person is known as the “trustee.” A trustee can be an individual or a corporation with trust powers, such as a bank.
- There must be money and/or property that is actually held by the trustee for the benefit of someone else. This is referred to as the “principal.”
- There must be someone who benefits from the trust. The “beneficiary” or “beneficiaries” can be people or charitable organizations.
Now that we have a better understanding of what trusts are, we’ve put together definitions of some of the most common types of trusts.
An estate plan for a married couple where the estate is divided into two trusts, with the “A” Trust qualifying for the marital deduction and the “B” Trust that uses up the decedent’s estate tax unified credit.
Charitable Lead Trust
A trust in which a charity is the income beneficiary and the remainder or principal is given to a non-charitable beneficiary.
Charitable Remainder Trust
A trust for the life of an individual where the income is paid to a non-charitable beneficiary and the remainder or principal is paid to a charity upon termination.
Credit Shelter Trust (Bypass Trust)
A taxable trust funded with the credit shelter amount. This type of trust is often used to provide benefits to a decedent’s surviving spouse, while avoiding inclusion in that spouse’s gross estate. Assets in this type of trust pass to descendants with no further estate taxes.
The beneficiaries have a limited power of withdrawal from this kind of trust. The withdrawal is usually limited to the amount excludable from gift tax under the annual exclusion.
Life Insurance Trust
A trust established to own, or be the beneficiary of, life insurance policies.
A trust designed to be in effect during the lifetime of the grantor. Also known as an “inter vivos” trust.
A trust consisting of property that qualifies for the marital deduction.
Special Needs Trust
A trust designed to help those with special needs (beneficiary) without impacting eligibility for federal benefits.
A trust established so that the interest of a beneficiary cannot be assigned or taken away by creditors.
A trust established by the terms of a will.
Trusts are highly personal and may differ greatly from individual to individual. It is always best to talk with a trust officer, attorney, or tax professional to fully understand your unique situation when developing a trust account.