These Types of Trust Funds Leave Your Legacy Intact
Millennial readers may not give much thought to trusts or trust funds unless you receive one at 18, 21, or 25, the most common ages for receiving money from a trust set up by your parents or grandparents. You need to think about it though whether you would receive money or leave it to someone. In fact, among the many types of trust accounts that exist, you can even set one up to provide for a family member or organization, or another individual while you both live.
However, if you would still prefer other ways to build wealth, we suggest opening a savings account. It’s a great way to start taking care of your finances and save up. Take a look at some of our favorite savings account options below:
Grab a cup of coffee now. May I suggest espresso?
The subject of trust involves numerous legal terms. We’ll review nearly every type in existence. We’re talking double digits here.
You may draw inspiration from wherever you can find it, but the coffee or a high-caffeine tea is a minimum requirement. Most people do not find this that exciting, but you will find it necessary as you age and accumulate wealth. You need to understand what your attorney says and what your financial planner recommends. The only way to do this is to learn the lingo.
Just Like Grade School, Here’s Your Glossary of Terms
These basic terms surrounding trusts may sound fun or funny, but they comprise a very serious set of financial terms you need to know. If you need a money management definition, check some prior articles. We are jumping right into the joys of trusts.
Party/Parties
This does not refer to the frat or sorority soirees you attended nor the shindigs at OU/TX or Clemson/Carolina nor does it mean dinner with tasty libations. Each individual or organization in a legal agreement, including a trust, is a party. In contracts, you use the language, “party of the first part,” “party of the second part,” etc. It can become confusing if you have many parties. Three parties comprise a trust – trustor, trustee, beneficiary.
Trustor
The term trustor refers to the individual or organization (party) that creates the trust document and grants control of assets, property, or an estate to the trustee.
Trustee
The term trustee refers to the individual or organization named as the responsible party who manages the trust created by the trustor, also referred to as a grantor. They are the person who is in charge of managing the property or assets the trustor gives them to keep, and are titled in the agreement.
Beneficiary
The term beneficiary/beneficiaries refers to the individual or organization named in the trust who receives benefits from the trust. Per the terms set out in the trust agreement, they receive the property or assets designated in the trust managed by the trustee for the trustor.
Assets
You probably already know this one, but just in case, anything of value you own qualifies as an asset. Your house, car, property, heirlooms, cash, stocks, bonds, business, cryptocurrency, copyrights, trademarks, etc. are assets. Every item included in your estate, if you formally created one, qualifies as an asset. Your savings account qualifies as an asset. Your checking account qualifies as a separate asset.
Revocable Trust
This term refers to any trust you can change or cancel. The trustor owns them and reports revenue from them on their taxes. Upon the death of the trustor they become irrevocable.
Irrevocable Trust
This refers to a trust that even the trustor cannot modify or revoke once created unless the beneficiaries. The trustor gives up ownership of the assets and losses control of them. This may sound scary, but it has significant tax advantages.You now know the basic terms for us to move along with the next exciting installment of learning about trusts! You get to learn about the many (and I mean many) types of trust agreements.
Now is the ideal moment to re-fill your coffee. Really.
Types of Trust Agreements
Let’s talk trusts. You have a plethora of choices. This allows you to choose the specific type you need and that level of customization really does matter when you deal with assets and their distribution.
Testamentary Trust
Inter Vivos Trust
This term refers to one of two types of personal trusts. Ultimately, although many types of trust exist, each either qualifies as a testamentary trust or an inter vivos trust.
The US Income Tax Act covers both types. A testamentary trust refers to a trust triggered by the death of the trustor.
This term refers to a living trust. The Latin phrase inter vivos means “among the living.” It ends upon the death of the trustor.
You decide when you establish the trust if you want it to provide for the beneficiary or beneficiaries in your death or while you live.
In order to have both in life and in death covered, you need two trusts. Let’s cover the sub-types now. We’ll start with the most common trusts first.
- 1. Spousal Trusts
You can create a spousal trust as an inter vivos or a testamentary trust. These provide a handy way of providing for a spouse incapable of asset management. This may occur due to health reasons, for example. Assets in spousal trust roll over tax-free. The spouse remains provided for although no other individual may benefit from the trust capital or the income prior to the beneficiary spouse’s death.
- 2. Alter Ego and Joint Partner Trusts
You can create a spousal trust as an inter vivos or a testamentary trust. These provide a handy way of providing for a spouse incapable of asset management. This may occur due to health reasons, for example. Assets in spousal trust roll over tax-free. The spouse remains provided for although no other individual may benefit from the trust capital or the income prior to the beneficiary spouse’s death.
- 3. Special Needs Trust
This term refers to a trust type that provides to meet the financial and medical needs of an individual with special needs. Typically, a dependent of the trustor, the individual with special needs is the named beneficiary. Creating this protects the individual’s right to government benefits. You can have a first-party special needs trust or a third-party special needs trust.
- 4. Qualified Terminable Interest Property Trust (QTIP Trust)
Yes, it shares a name with a handy stick with which you clean out your ears, but it’s not that kind of QTIP. A QTIP trust divides the trustor’s assets between beneficiaries at different times. You might leave income to your spouse when you die, then the same trust begins distributing income to your children when they die. Putting this in trust protects the assets after your death. Your spouse receives income, but cannot touch the principal, ensuring the assets remain to benefit your children once the spouse dies, too.
- 5. Blind Trust
No jokes about three mice; a blind trust refers to trust in which the trustee manages the assets without the knowledge of the beneficiaries. This works well if the beneficiaries have little fiscal management skills or would fight over how to manage the assets. The trustee typically has a savvy amount of money management skills and may work as a certified public accountant or financial planner.
- 6. Spendthrift Trust
The term spendthrift trust refers to a trust that protects the assets from the beneficiaries if you think or just know deep in your heart that they would squander them if they received them all at once or too young. You can set one up to provide maintenance income to them, but does not allow them to touch the principal.
As mean as that sounds, it is necessary. Not to overshare, but pick the oldest age you can to distribute this. My parents set up a trust fund for me that I received when I turned 18 and that was too young. Honestly, I was far too immature to handle the money and I did blow all of it in less than two years. My folks did not know to set up an income distributing trust and instead, chose to allocate my full principal assets to me at the ripe young age of 18. I was the epitome of with it and together, but I still spent it. Despite being the squeaky clean, nerdy girl who was already modeling in my senior year, I just was not mature enough, and to be honest, your kids probably are not either. Your future kids will not be mature enough to handle receiving a large amount of money at one time. I was and they are kids.
People do not learn from others’ mistakes. Your kids will make their own, but you can ensure this will not be one of them. Set up the trust as a spendthrift trust. Make the distribution age 25 or later. You disperse an income until that time, but you need to make sure they genuinely have the skills and mindset to manage the money before they get it. Otherwise, they will blow it on today’s equivalent of the 1980s New York City fun spot The Tunnel and brunches at Teacher’s Too when they visit their cool cousins. They will so head it off at the pass by knowing what to request from your attorney and CPA. Now that my moments of honest soul-bearing have ended, let’s move on to charitable trusts. - 7. Charitable Trust
This refers to a trust that the trustor creates to support a charity or non-profit organization dear to their heart. Typically, a testamentary trust, it could get created as an inter vivos trust if desired. Using the testamentary trust option lets the charity avoid gift taxes. You can incorporate this into a standard trust, too. You also need to declare a power of attorney (POA) in your estate planning though.
Let me blow through the more esoteric types of trust funds. Ask your lawyer about these if they sound handy.
This term refers to a revocable payable-on-death account. You create an account and fund it. When you die, the beneficiary inherits it.
This term refers to a financially protective trust that shelters your assets from legal settlements including divorce, creditors, and estate judgments plus taxation and bankruptcy.
This term refers to a court applied trust created with the court determines that the party in question unfairly secured the possessed assets, commonly referred to as “unjust enrichment.” The court uses the trust to transfer the assets to their rightful owner(s).
This term refers to a tax by-pass trust that lets the trustor protect assets from incurring federal estate taxes multiple times. Married couples use this to transfer assets to the surviving spouse. When the spouse dies, the trust assets pass to any children. This trust divides assets into “trust type A (revocable) & B (irrevocable).”
This term refers to the handy way to skip your kids and leave it all to your grandchildren. You think I am kidding, but sometimes the kids turn out to be a flaky brood, the grandchildren turn out to be gems. This is your trust if that sounds like your family.
This term refers to a trust that lets an affluent couple decrease or eliminate the estate tax bill through asset transfer from the deceased spouse’s estate to the surviving spouse’s estate without increasing the value of the surviving spouse’s estate.
This term refers to an irrevocable trust created using a life insurance policy. It receives the life insurance policy proceeds so they can be invested and distributed without the beneficiaries incurring estate taxes.
Wrapping Up the Types of Trust Funds You Could Use
That is it. You now know all the types of trusts available. You have a handle on the major terms your CPA or attorney might use.
So, now you are totally ready to sit down with your lawyer or your financial planner or CPA, etc. and plan your estate. You know that phrase, the last will and testament? A trust or trusts should become a part of your estate planning. Your last will and testament comprise the overarching, go-to document, but each trust you create becomes a facet of the will.
It’s Never Too Early to Start Building Wealth. Learn How with the Wealthry Store.
You could never be too young to create a will or set up a trust. Just think. There is even a trust option that lets you have a backup plan to provide for yourself if something terrible happens to you.
Trusts can be funded or unfunded. That means you do not have to immediately fund the trust. You will need to eventually, but you do not have to the day to create the trust. Your attorney can explain this in detail.
Finally,
You can develop money handling skills and trusts make a great place to start. You can even use one of these to force yourself to stick to a budget or to directly pay your bills without touching your money or being able to do so. You could also set up such a trust to pay for your children. That means they never miss their rent payment or the electric bill.
You can even set up a trust that pays their grocery delivery bill each month. With a company like Schwan's or Blue Apron, they pick the food and it gets delivered once per week or every two weeks. You can deposit the funds via a trust and ensure they have groceries without giving them access to the money. It might sound unfair, but it ensures they have heat, food, shelter, etc. and frees you from constantly having to save them from a cutoff notice. You also never have to pay a late fee again.
Contact your CPA or attorney to discuss how a trust could benefit you. You can shelter money for a rainy day and provide for your family’s future by using trusts.