There are many types of trusts, and each serves a highly specific purpose in estate planning and asset protection. Most trusts allow assets to be passed directly to heirs, minimizing privacy risks and avoiding the costly probate process. Identifying the best-suited trust for your specific needs is vital to forming your estate plan, reducing estate taxes, and making life easier for your loved ones after your passing. At the same time, choosing among the myriad types of trusts can be difficult without legal help. If you live in Washington state and are interested in creating a trust or developing an estate plan, consider speaking with a knowledgeable attorney at Baxter Legal Services at (425) 686-0574 to learn how we may be able to assist with your estate planning needs.
Common Elements In All Types Of Trusts
There are many different types of trusts, but they all share some common elements. Understanding who and what is involved in trusts makes comparing different types of trusts easier. Here are some common elements of trusts:
- The trust document establishes rules and instructions for the functioning of the trust and appoints specific people to the roles below.
- The trustor (also sometimes called the settlor or grantor) creates and funds the trust by transferring assets to the trust.
- The trustee is responsible for managing the assets held by the trust.
- The beneficiaries receive the assets of the trust.
Each state has slightly different laws governing the formation and oversight of trusts, and the Washington State Legislature has established very specific requirements for trusts in Washington.
Types Of Trusts: Revocable Versus Irrevocable
Trusts are designated as revocable or irrevocable. Each of these types of trusts has advantages and disadvantages, and it is important to choose the best type of trust for each situation.
Revocable trusts can be modified or canceled (revoked). They allow trustors the flexibility of transferring assets in and out of the trust. Assets held within a revocable trust are still considered the property of the trustor, who is liable for reporting any income generated by the assets and paying taxes accordingly. Revocable trusts become irrevocable on the death of the trustor.
Irrevocable trusts can only be changed under specific and limited circumstances, and changes typically require the beneficiary’s consent. Under an irrevocable trust, the trustor transfers ownership and control of assets to the trust itself and is not liable for income taxes on assets owned by the trust. Irrevocable trusts can also reduce estate taxes in some instances.
Common Types Of Trusts
Although all trusts can be categorized as revocable or irrevocable, there are many different types of trusts. Each has specific rules and advantages, and it is advisable to consult an attorney before selecting and creating a trust as part of an estate plan. Knowledgeable estate planning attorneys at Baxter Legal Services may be able to help you decide which types of trusts best fit your needs.
Testamentary trusts are outlined in a last will and testament during the trustor’s life but do not go into effect until after his or her death. Also called a “will trust” or “trust under will,” the trustor retains ownership of assets until death, at which time they are transferred to the trust. Testamentary trusts are subject to the probate process, which can result in a loss of privacy.
Qualified Terminable Interest Property (QTIP) Trusts
Of all types of trusts, QTIP trusts can be uniquely well-suited for families which have undergone divorces, remarriages, and involve stepchildren. QTIP trusts allow the trustor to pass on assets to multiple beneficiaries at different stages. It is common to use a QTIP trust to provide income for a spouse after the trustor’s death, with the remaining balance given to the trustor’s children after the spouse’s death.
Totten trusts are simple revocable trusts which allow trustors to pass money directly to someone else upon death. Totten trusts, also sometimes called “payable on death” accounts, are established at a bank with specific titling language. When the trustor dies, the funds in the account are payable to the named beneficiary, avoiding probate. Funds held in Totten trust accounts are not considered part of the deceased’s estate.
Life Insurance Trusts
Life insurance trusts are created with a life insurance policy as the only asset. Life insurance funds are generally not considered taxable income for the beneficiary, but the value of the death benefit is usually included in the value of the deceased’s estate. A life insurance trust becomes both the owner and the beneficiary of the life insurance policy, sheltering the proceeds of the policy from estate taxation after the trustor’s death.
Credit Shelter Trusts
Credit shelter trusts, also sometimes referred to as a family, bypass, or AB trusts, allow a couple’s estate to be passed on to the surviving spouse, then to children, without multiple rounds of taxation. The trustor transfers assets to the irrevocable family trust up to the IRS’s estate tax-exempt amount and places the rest of the estate in a revocable trust for the spouse. The spouse can inherit the assets in the revocable trust tax-free, and the family trust is not subject to taxation - even if it grows beyond the exempt amount.
Generation-skipping trusts are similar to credit shelter trusts, but the two types of trusts have one key difference. Rather than passing assets in the family trust to the trustor’s children, assets are passed to the trustor’s grandchildren or even great-grandchildren, who inherit the assets within the trust without the burden of the estate tax.
How An Attorney Can Help With Different Types of Trusts
Selecting the best types of trusts for your unique situation requires advanced legal and financial knowledge. Choosing the wrong trust format can be a serious misstep in estate planning, potentially exposing an estate to higher taxes, probate proceedings, and loss of privacy. An effective estate plan considers your assets, your wishes, and the most advantageous types of trusts to preserve your legacy as you see fit. If you are interested in creating a trust or forming an estate plan in Washington state, consider speaking with a knowledgeable attorney at Baxter Legal Services at (425) 686-0574 to learn how we may be able to help with your estate planning needs.