An In-Depth Review at The Common Types of Trusts
With all the variations of trusts out there, how can you decide which option to choose?
Pacific Portfolio Trust Company is here to help. We’ve rolled up our sleeves and organized an overview to define the most common types of trusts and why they’re used. Continue reading to learn more about which trust is right for you and your family.
Trusts are valuable tools which allow you to exercise control over your family legacy which would not otherwise be possible. Instead of leaving all your assets outright to one individual, for example, placing those assets in a trust will allow you to provide benefits to multiple beneficiaries. There is a myriad of uses of trusts. Your relationship officer at Pacific Portfolio Trust Company can explore their many uses to prepare you for a planning session with your other trusted advisors, such as CPAs and attorneys.
Because a trust allows you to control how your assets are managed both during and after your lifetime, people with special circumstances, such as those who are caring for a child or family member with special needs, or managing succession planning for a closely held business, find it to be a very appealing option. A trust even allows you to specify certain conditions that must be met for a transfer of assets to be completed.
We specialize in the below types of trusts which are in common use today, specifically for financial and estate planning purposes:
· Living Trust
A Living Trust is also known as a Revocable Trust. It’s created, by you, during your lifetime, and will eventually benefit your named beneficiaries after you pass away. Although it will help your loved ones steer clear of the costly and often expensive process of probate, Living Trusts are not a viable option for asset protection while you are alive.
· Credit Shelter, or Bypass Trust
A Credit Shelter Trust can significantly reduce estate taxes as assets are passed on to beneficiaries. A clear advantage is the right it provides to surviving spouses once the first spouse passes. Educational or medical expense needs can be covered by not only the income, but also the principal of the Trust. Estate taxes would not be triggered once assets are transferred to the final beneficiaries after the surviving spouse passes away.
· Grantor Retained Annuity Trust (GRAT)
A GRAT is an irrevocable trust that allows the Trust’s creator, also known as the grantor, to manage assets into a temporary Trust and freeze the value, removing excess growth from the grantor’s estate and providing it to heirs with marginal estate taxes.
· Charitable Trusts
With a Charitable Trust, you can donate to nonprofit organizations while building a consistent stream of income for yourself or beneficiaries. The two types of charitable Trusts are a Charitable Lead Trust (CLT) and a Charitable Remainder Trust (CRT). Both permit you to qualify for an income tax deduction as well as minimize potential capital gains tax and estate tax.
· Qualified Personal Residence Trust (QPRT)
A qualified personal residence trust (QPRT) is a special type of Irrevocable Trust that is created to contain your primary or secondary residence and remove its value from your taxable estate.
· Qualifying Terminal Interest Property (QTIP)
QTIP Trusts are “Qualified Terminable Interest Property Trusts.” They are used to guarantee that income from the Trust would be paid to a survivor spouse, but the excess funds would be held in the original Trust until the second spouse passes. At that point, the amount left would be passed on to beneficiaries.
· Special Needs Trusts
Special Needs Trusts are designed for the well-being of a physical or mentally disabled person, under the age of 65, who requires life-long care. These Trusts are a way to care for financially, without compromising any qualification for supplemental government aid (SSI or Medicaid). There are three main types of Special Needs Trusts. The one you ultimately choose will depend on your circumstances and type of need(s).
· Spendthrift Trusts
A Spendthrift Trust is irrevocable and comes with a unique provision providing asset protection. This type of trust can be used to restrict a beneficiary’s access to Trust assets. If your spendthrift child, that is appointed as beneficiary, has debt(s) of some kind or another, or faces a lawsuit, the trust assets cannot be used to pay for these debts.
The right way to decide the Trust that is best for you and your situation is to talk with an experienced advisor. Consult with your estate planning attorney and CPA, in conjunction with your financial advisor. If we can help you with that planning, please contact us.
Disclaimers:
Views expressed are as of the date indicated and are not intended to serve as investment advice, tax advice, a recommendation, offer, or solicitation to buy or sell any securities; they are based on the information available at the time and are subject to change based on economic, capital market, and other conditions. Any investment decision should be based on an individual’s own goals, time horizon, and tolerance for risk.
Prior performance does not guarantee future results and there is the potential for the loss of your capital investment.
Information and data provided have been obtained from sources deemed reliable but are not guaranteed.
