Trusts – Understanding the Main Categories
We have all heard of trusts, and there are many different types. In this article we will discuss the primary categories of trusts that are used to organize and facilitate the transfer of your personal assets to your heirs, while at the same time arranging for the use of these assets during your lifetime.
If you are the person who is setting up the trust for your assets, you will be identified as the grantor or settler. (I know, you really wanted another title to go along with your name, right?) Your heirs will be called the beneficiaries of the trust, and you will identify a trustee to manage the trust, or to act as the owner. I personally find the term owner to be a little strange for the trustee, since they have a trust document that sets up rules of their actions that was created by the grantor, and they are obligated to act according to those rules. That term, though, does denote the separation between the grantor and the assets.
Revocable or Irrevocable Trusts
The first category differentiation would be Revocable vs. Irrevocable trusts. The primary difference is whether the terms of the trust can be revoked. In a revocable trust, which is also what we generally refer to as a “living trust” the grantor has the right to revoke/rescind, and then take back the assets that were placed into the trust. Many governmental jurisdictions would rule that this makes the grantor responsible for the income, taxes, and records for the trust. It is more vulnerable to creditors than the irrevocable trust, but it does provide a greater level of protection than a will, and comes with the advantages of being able to earn income from the trust during my lifetime, and knowing that the trust will be transferred or managed after my death in the way that I have set up the trust.
Irrevocable trusts, obviously, then, cannot be rescinded, the trustee is responsible to carry out the instructions in the trust, and is classified as the owner. This literal and permanent transfer of the assets makes them less vulnerable to creditors. But bear in mind that the protection from creditors only begins once the trust has been completely set up, a person cannot dodge a filed lawsuit or claim by rushing to set up a trust.
Fixed or Discretionary Trusts
The other category of differentiation is the fixed vs. discretionary trust. A fixed trust is written with a clear set of instructions for distribution, including the when, and the how much. We have all watched movies where part of the premise is that a child must reach the age of 25, or some other age of “majority” upon which the assets of the trust will be distributed in whole.
A discretionary trust leaves the decisions of when and how much in the hands of the trustee, with some guidance usually written into the trust to assist them in making wise decisions regarding the distribution. A kind of subcategory of the Irrevocable and Discretionary trust type is called the “spendthrift” trust, which is designed to protect people who either cannot or will not manage money wisely from quickly bankrupting themselves.
Trusts are valuable for your protection as you plan for the future, but also for the benefit of your heirs, your beneficiaries. Of particular importance is the irreversible nature of some trusts. This is not like a will that you can tear up one day when you reconcile with one of your errant children, it can be permanent. We advocate working with professionals who can discuss with you in detail the options and the ramifications that come along with your decisions. Plan wisely, your future and that of your heirs are all at stake.
I https://www.fool.com/retirement/2018/09/24/understanding-the-main-types-of-trusts.aspx from the Motley Fool website.