There are an almost unlimited number of different types of living trusts. This flexibility is one of the primary advantages of a living trust.
Each living trust is unique and created to accomplish its own particular purpose. However, certain types of living trusts are worth highlighting.
The following is a non-exhaustive list:
Asset Protection Trust – Promoters say this type of living trust can be used as part of a comprehensive plan to protect your assets from creditors and/or lawsuits. Asset Protection Trusts usually don't work!
Charitable Living Trust – This type of living trust can be used to make a charitable gift, receive a tax deduction, and still continue to benefit from use of the property in the trust. The tax deduction could be a current income tax deduction or an estate tax deduction for your estate. The principle types of charitable living trusts are the Charitable Remainder Trust and the Charitable Lead Trust.
Credit Shelter Trust (or Bypass Trust) - This trust could be a living or testamentary trust. It is used to ensure that a husband and wife both fully use their estate tax exclusion.
Crummey Trust – This type of living trust provides a way to make tax-free gifts to your children (for instance) and have the gifts placed in a trust that will accumulate for the benefit of the child until he or she reaches the age when you want him or her to have access to the money or property.
Disability Trust -- A Disability Trust is very similar to a Special Needs Trust (see below). The objective is to be able to place assets into a trust to support the disabled individual -- but not disqualify him or her from Medicaid or SSI. Disability Trusts, that aren't Medicaid or SSI disqualifying, have strict rules that must be followed.
Irrevocable Living Trust - Assets placed in an irrevocable living trust are given away for good. They cannot be retrieved. Obviously most people don't want to do that. However, an Irrevocable Living Trust could potentially be used to save income or estate taxes or in some circumstances to protect assets from creditors. This page explains an irrevocable living trust. Sometimes this trust is referred to as an Inheritors Trust.
Legacy Trust and Dynasty Trust - These trusts are really just different names for the same thing. They are primarily used to pass assets to multiple generations of heirs while avoiding "transfer" taxes (i.e. estate taxes) each time the trust passes to a new generation. These trusts are sometimes referred to as a "family trust."
Life Insurance Trust (ILIT) - This is an example of an irrevocable living trust. It is set up to provide a way for the proceeds of your life insurance policy to not be included in your estate for estate tax purposes.
Medicaid Trust - Medicaid trusts are commonly referred to as a vehicle that can be used to protect assets from Medicaid. However, be forewarned -- the Medicaid trust strategy is fraught with danger. It is difficult to shield assets from Medicaid. However, there are legal ways to do it. For instance, a Medicaid Annuity.
Offshore Trust – This type of living trust that promoters say can protect your assets from both taxes, creditors and/or lawsuits. However, tread carefully. Unless you are prepared to move yourself and your assets to the foreign country, this type of trust probably won't work.
Qualified Terminable Interest Property (QTIP) Trust – This type of trust is normally used in connection with second marriages. A QTIP would allow you to put property into a trust that your spouse can receive income and support from. Upon your spouse's death, the trust assets could go to whomever you designated (i.e. children from a prior marriage.)
Revocable Living Trust - This is the most common type of living trust. It can be amended or revoked at any time. Sometimes this is also referred to as a family trust if the beneficiaries include children.
Special Needs Trust - A Special Needs Trust is created to provide a place where assets can be placed to support someone who is disabled or has special needs, and yet not have those assets considered for Medicaid or SSI purposes. For example, a parent may have an adult child with special needs. The parent would be able to place assets into a Special Needs Trust that can be used to provide certain kinds of support to the child. There are strict rules about the type of support a Special Needs Trust can provide. There are also rules to prevent the child from gaining control of the trust. As long as the trustee of the Special Needs Trust complies with those rules, the trust’s assets are not considered the child’s for purposes of qualifying the child for Medicaid or SSI.
Spendthrift Trust - A "spendthrift" is someone who spends too much or spends wastefully. So, the idea with a "Spendthrift Trust" is to place assets into a trust so that they can be used to support someone (usually a child) but the beneficiary does not control the assets and his or her creditors generally cannot reach the assets.
Testamentary Trust - Actually this is not a "living" trust at all since it is only activated by a will -- upon the donor's death. But, since it is the most common trust of all, we thought we should mention it. And, in its common "AB Trust" form -- it can be quite useful.
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