What Types of Living Trusts Are There?

One of the most important crossroads in the process of making final arrangements is the choice of whether to create a trust, and if so, which type.

Living trusts are a standard and popular option, but there are a few different types, each of which offer different benefits.

As you form your end-of-life plan, here's what you need to know about living trusts.

What Is a Trust?

At its essence, a trust is a private, documented, legal arrangement that allows a third party – such as a bank or another person -- to hold money and other assets on your behalf until a specified circumstance and/or time. You're considered the trustor. When that specified time comes, the third party, known as the trustee, is responsible for carrying out the trust's terms, or instructions.

Assets can include financial accounts (checking and savings accounts, cash, mutual funds, stocks, bonds, and safe deposit boxes), real estate, business interests, and personal property.

Trusts are usually used to make estate taxes as low as possible and to avoid your estate going through probate, the court process that's required without a trust in place. Since probate proceedings are recorded in the public record, trusts are a way to keep your estate finances private.

Trusts also let you carefully control when and to whom your money will be distributed, and they make sure your money is protected from being used in ways you don't support. Many people create both a living trust and a will, since they can each have different functions and benefits.

What Is a Living Trust?

All trusts are known as either testamentary (created after death according to instructions left in the grantor's will) or living. A living trust is one that's created while you're alive. It appoints a trustee to manage your assets and lays out detailed instructions about what should be done with your assets after you pass away -- including designating who'll be receiving the money (the beneficiary). A living trust is also called an inter vivos trust.

Types of Living Trusts: Revocable Living Trust and Irrevocable Living Trust

Living trusts come in two varieties: revocable and irrevocable. Revocable living trusts, the most common type, are flexible, and they can be changed during the lifetime of the grantor. Irrevocable living trusts, on the other hand, can’t usually be altered once they’re set up.

Revocable Living Trust

With a revocable living trust, the grantor can designate themselves as the trustee, while also setting up a "successor trustee," or someone who will be the trustee after the grantor dies. Since the grantor is also the trustee, while they're alive they have total control over the rules they’ve set up and can change them at any time. They can change trustees, add or remove assets, change who receives the money (the beneficiaries), and even dissolve the trust completely.

A revocable trust is still taxable, and though the grantor has set up a trustee, the grantor is still the owner of the assets. Therefore, the grantor is responsible for paying taxes as well as reporting on investment returns. In addition, the assets in a revocable trust are still available to creditors.

It's possible to set up a revocable trust in different ways. For instance, you can set it up to end upon your death, and the assets be distributed to the beneficiaries as you have instructed. However, usually, once a grantor dies, their revocable living trust shifts into an irrevocable living trust.

Irrevocable Living Trust

An irrevocable living trust cannot be changed after it's established. The grantor can't designate themselves as a trustee, so they give up control over changing, amending, or managing the trust, and they can’t take back any of the money or assets. Instead, the trustee appointed by the trust is completely in charge of it and is essentially its legal owner.

With an irrevocable living trust, since the grantor no longer owns the assets in the trust, they can no longer be taxed on them. They won't be included when government programs like Medicaid or Medicare are looking at your eligibility or how much they’ll pay out on medical bills. Also, irrevocable trusts can't be accessed through lawsuits or by creditors who are seeking to have debts repaid.

Types of Irrevocable Living Trusts

Depending on the purpose of your trust, there are a few different kinds of irrevocable living trusts that you can choose from, including:

• An irrevocable life insurance trust (ILIT): This is used for paying estate taxes on property or a business intended to stay in the family once you’re gone.
• A grantor retained annuity trust (GRAT): This is used to minimize the taxes that beneficiaries pay on their inheritance.
• A qualified personal residence trust (QPRT): This allows you to transfer a personal residence to a beneficiary, but it also allows for an increase in the value of the home.
• A charitable remainder annuity trust: This enables you to leave money to a charity after your death.

Benefits of a Living Trust

A living trust offers several benefits to both the grantor and beneficiaries:

• Living trusts allow the grantor to control when and how the beneficiary receives their estate.
• The assets in a trust can be transferred to the beneficiaries without having to go through probate.
• If you want, you can retain control of your assets while you're alive.
• You can set it up so your trustee takes over management of the trust if you're incapacitated.
• A trust can be legally challenged, but the risk is much lower than with a will.
• A living trust decreases the amount of your taxable estate, lowering your taxes.

Setting up a living trust can be a great way to prepare your estate for your family and other beneficiaries. It can be helpful to explore the different types of trusts with the help of an estate planning attorney who’s familiar with trusts. In this way, you can be sure you’ll have your financial affairs arranged exactly how you want them when the time comes.

The Neptune Society is the nation's oldest and largest provider of affordable cremation services. Whether you have an immediate need or want to plan cremation services in advance, we are always available to assist you and your family. Call 1-800-NEPTUNE (800-637-8863) today or contact us online to learn more.