What Does Trust Mean In Estate Planning?
An entity that holds assets for beneficiaries. Beneficiaries can be the grantor, grantor’s spouse/children, charities, pets, or other named individuals. Beneficiaries can be named without being currently living.
Common Types Of Trusts
Revocable Trust
A trust formed during someone’s lifetime which they have the right to “revoke” or end/cancel, change or amend during their lifetime. This is commonly referenced as a way to avoid probate (trusts don’t die), but because the person has kept rights to the property it will not help avoid taxes. These trusts need to be funded during life to gain their full benefit.
GRAT: (Grantor Retained Annuity Trust)
A trust used to transfer very large gifts without gift tax. This is set up for a period or specific term with the Grantor receiving an annuity over that time. At the end, what remains in the trust passes to the beneficiaries tax free.
Living Trust: (See Revocable Trust above)
Inter Vivos Trust: (See Revocable Trust above)
This is a Latin term meaning “between the living” but is the same as a revocable trust described above.
Pet Trust
A trust set up specifically to help care for pet/s after death. Generally able to be used by the person caring for the pet for pet-related costs, can pass to beneficiaries or charity upon death of pet.
QTIP Trust
(Qualified Terminable Interest Property Trust): This trust will delay estate tax until a surviving spouse dies so that more income will be available to that surviving spouse during his or her lifetime.
QDOT Trust: (Qualified Domestic Trust)
This trust will allow a non-citizen spouse to qualify for a marital deduction at the death of his or her spouse.
QSST: (Qualified Subchapter S Trust)
A trust that meets the IRS standards to be allowed to own subchapter S stock.
Conduit Trust/Pass Through Trust
A trust set up to be the beneficiary of an IRA which states that any distributions made to the trust must be paid out of the trust that same year, no accumulation is allowed.
Community Property Trust
A trust that will cause the assets within to be treated as community property even when not in a community property state. This is best for couples that have low-basis assets since it allows a double step-up in basis of assets at death resulting in reduction or elimination of capital gains tax upon sale. South Dakota is one of only a few non-community property states to allows community property trusts.
Special Needs Trust/Supplemental Needs Trust
A trust intended to supplement the life of a disabled individual without interfering with state or federal benefits they are or may become entitled to. This can be set up by someone else, or by the disabled person themselves. Different rules will apply depending on who sets up this trust.
Testamentary Trust
A trust that is not formed during a person’s life, but is instead formed at the person’s death, generally through provisions in their will. This does not avoid probate.