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Common Types of Trusts

Law Offices of Yu & Associates

A trust is the main tool for asset transfer and inheritance, and it is also a legal contract. The grantor or settlor establishes a trust, funds the trust by putting assets under the name of the trust, and entrusts the property or property rights to the trustee. The trustee manages and distributes the assets to serve the best interests of the beneficiary based on the grantorí»s wishes.

  1. Living Trust

    A living trust is established by the trust grantor during their lifetime, and the grantor has full control and discretion of the assets during their lifetime. When the trust creator dies or becomes incapacitated, the trustee will take over the control and management of the assets for the best interest of the beneficiary. A living trust makes it possible to avoid probate court, but only if the grantor funds the assets in the trust.

  2. Testamentary Trust

    A testamentary trust is established only when an individual dies. This happens if the testator made a will before their death and put the details about the trust in the last will and testament. The testamentary trust is a provision made in the will that instructs the executor of the estate to create the trust, but the testamentary trust only comes into play after death. Compared to a will, a testamentary trust is generally more suitable for the following situations: children with disabilities who need to be effectively taken care of using the asset inherited; children with issues who may squander the assets in a short period of time; children who may get divorced or have debts; a blended family with the desire to have children from the previous marriage receive the trust assets; or remarriage of a spouse after the death of testator, which may cause the estate to be diverted to the new family.

  3. Revocable Trust

    A revocable trust, like a living trust, is created during the grantor's lifetime. The grantor can change, terminate, or alter the trust during the grantor's lifetime. It is a tool that is set up to transfer assets outside of probate. The three important roles of the trust, the grantor, the trustee, and the beneficiary, can be the same person, who can manage their own assets, and then the management right is turned over to the successor trustee upon the grantor's death.

  4. Irrevocable Trust

    An irrevocable trust is the one that a grantor cannot change or alter during their lifetime or that cannot be revoked after their death. Because the assets transferred to this type of trust cannot be moved back into the possession of the grantor, irrevocable trusts are often more tax efficient, and there may be no estate taxes at all under certain circumstances.

  5. Insurance Trust

    Insurance trusts allow a grantor to combine their life insurance policy with a trust, keeping it free from taxation on the estate itself. An Irrevocable Life Insurance Trust (ILIT) is a type of irrevocable trust. The death compensation from life insurance paid to the irrevocable life insurance trust will be excluded from the gross estate of the insured, thereby achieving the purpose of reducing estate tax. An ILIT is an irrevocable trust and will prohibit the grantor from changing their life insurance policy, but it allows the life insurance policy to pay for post-death expenses on the estate.

  6. Dynasty Trust

    A dynasty trust is a type of irrevocable trust created to pass wealth from generation to generation. It could protect the trust assets from the creditors of each generation and potential spousal claims during a divorce; and it could also minimize the estate taxes otherwise due on passing assets outright to children. As long as the assets remain in a well-structured dynasty trust, the value of the asset will keep growing substantially and the trust will save the descendants a significant amount of money in estate taxes.

  7. Qualified Terminable Interest Property Trust (QTIP Trust)

    A qualified terminable equity trust is a special type of trust that distributes assets to different beneficiaries at different times. The QTIP trust allows the transfer of assets to the spouse first by putting the asset in the QTIP trust when the trust grantor dies. There should not be other beneficiaries appointed. The remainder of the assets will then be distributed to the children after the death of the surviving spouse. A QTIP trust can be a good plan for blended families. A QTIP trust enables the children of the grantor of the trust from prior marriages to obtain the estate left behind after the death of the spouse of the grantor.

  8. Charitable Trust

    A charitable trust is a type of trust that has a charity or non-profit organization as the beneficiary. Setting up a charitable trust can help support charity organizations while also having some tax advantages. There are two types of charitable trusts: charitable remainder trusts (CRT) and charitable lead trusts (CLT). CRT is the most popular type of charitable trust. The charity chosen by the grantor serves as the trustee and has control to invest and manage the trust funds. The charity pays the income for the lifetime of beneficiary (which could be the grantor) or for a predetermined number of years. At the end of the term, the charity receives the remaining assets of the trust. With a CLT, when the trust term expires, the charity no longer controls the assets, and ownership goes back to the grantorí»s heirs or other beneficiaries.

  9. Qualified Domestic Trust (QDOT)

    Under U.S. tax law, a surviving spouse is eligible for an unlimited marital deduction, which means assets can be distributed to the surviving spouse without incurring estate taxes. However, this only applies to US citizen spouse. If the surviving spouse is a non-U.S. citizen, they cannot enjoy such tax relief. A special trust such as QDOT can enable the surviving spouse to receive the marital deduction on estate taxes even if they are not a U.S. citizen, as long as the assets of the deceased spouse are included inside the QDOT trust.


The above is a general introduction, and should not be construed as individual legal advice. For specific legal questions, please contact the Law Offices of Yu & Associates. Tel: 301-838-8986, Fax: 202-595-1918; E-mail: syu@yulegal.com, Address: 110 N. Washington St., Suite 328E, Rockville, MD 20850. (All rights reserved.)

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