What Are the Different Types of Trusts?

A trust is a legal arrangement in which one person (the trustor or settlor) transfers ownership of assets to another person or entity (the trustee) to manage for the benefit of a third person (the beneficiary). 

There are several types of trusts, each with its own unique benefits and purposes. In this article, I will provide an overview of the most common types of trusts and the situations where they are most useful.

Revocable Trusts

A revocable trust, also known as a living trust, is a trust that can be amended or revoked by the trustor during their lifetime. The trustor retains control over the assets in the trust, and can make changes to the trust or terminate it at any time. This type of trust is often used to avoid probate, which is the legal process of distributing assets after a person's death. By placing assets in a revocable trust, the assets are not subject to probate and can be distributed to the beneficiaries more quickly and privately.

Irrevocable Trusts

An irrevocable trust is a trust that cannot be amended or revoked by the trustor once it has been established. The assets in the trust are owned by the trust, not the trustor. This type of trust is often used to protect assets from creditors or to reduce estate taxes. Because the trustor no longer owns the assets in the trust, they are not subject to estate taxes upon the trustor's death. Additionally, assets in an irrevocable trust may be protected from creditors, depending on the laws of the state where the trust is established.

Testamentary Trusts

A testamentary trust is a trust that is established in a person's will and takes effect after the person's death. This type of trust is often used to provide for the financial needs of minor children or individuals with special needs. Because the trust is established in the person's will, it can be used to distribute assets in a controlled manner over time.

Special Needs Trusts

A special needs trust is a type of trust that is designed to provide for the needs of a person with a disability without disqualifying them from government benefits such as Medicaid or Supplemental Security Income. This type of trust can be either revocable or irrevocable and is often used to provide for the long-term care of individuals with disabilities.

Charitable Trusts

A charitable trust is a trust that is established for charitable purposes. The assets in the trust are used to benefit a specific charity or cause. This type of trust can provide significant tax benefits for the trustor, including income tax deductions and estate tax savings.

Asset Protection Trusts

An asset protection trust is a type of trust that is designed to protect assets from creditors. This type of trust can be either revocable or irrevocable and is often established in states with strong asset protection laws. Because the assets are owned by the trust, they are not subject to claims from creditors.

Trusts are a valuable tool for managing and protecting assets, but it is important to review and update them periodically to ensure they continue to meet your needs and goals. As a general rule, it is recommended that trusts be reviewed every three to five years or whenever there is a significant change in your life circumstances or the law.

Here are some specific situations that may prompt a review and possible update of your trust:

1. Changes in your family or beneficiaries: If you have new children, grandchildren, or other family members, you may want to update your trust to ensure that they are included as beneficiaries. Similarly, if there are changes in your family relationships or if someone passes away, you may need to make changes to your trust to reflect these changes.
2. Changes in your assets: If you acquire new assets or if the value of your assets changes significantly, you may need to update your trust to ensure that your assets are properly distributed.
3. Changes in the law: The laws governing trusts and estate planning can change over time, and it is important to ensure that your trust is in compliance with the most current laws and regulations.
4. Changes in your goals: If your goals or priorities change over time, you may want to update your trust to reflect these changes. For example, if you initially established a trust to provide for the needs of minor children, but they are now adults, you may want to modify the trust to reflect their changed circumstances.
5. Changes in your trustee or successor trustee: If your trustee or successor trustee is no longer able or willing to serve in that role, you may need to update your trust to appoint a new trustee.

The costs associated with creating a trust can vary depending on several factors, such as the complexity of the trust, the value of the assets involved, and the state in which the trust is created. That being said, here is a table showing some of the typical costs associated with creating different types of trusts:

Revocable Trust
Typical Cost: $1,000-$3,000

Irrevocable Trust
Typical Cost: $3,000-$10,000+

Testamentary Trust (and Will)
Typical Cost: $2,000-$3,000

Special Needs Trust
Typical Cost: $2,000-$5,000

Charitable Trust
Typical Cost: $2,000-$5,000+

Asset Protection Trust
Typical Cost: $5,000-$10,000+

It is important to note that these costs are just estimates and can vary depending on the specific circumstances of each case. Additionally, ongoing maintenance costs such as trustee fees and tax filings should be factored into the total cost of establishing and maintaining a trust. It is always recommended to consult with an experienced trust attorney to get a more accurate cost estimate for your particular situation.

In conclusion, trusts can be an important part of an effective estate plan, providing a way to manage and protect assets for the benefit of loved ones or charitable causes. However, to ensure that your trust continues to meet your goals and objectives, it is important to review it regularly and make updates as needed. An experienced trust attorney can help guide you through this process and ensure that your trust is up to date and effective. If you are considering establishing a trust, consulting with a trust attorney can help you determine the best type of trust for your unique needs and goals.