Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Just the thought of reaching the end of life can get sensitive and poignant, so much so that it can lead many of us to put off important planning discussions. This is a brief guide to help clients understand if a trust is required and, if so, which type of a trust is suitable to ensure that their wishes are honored.
A trust is a legal entity created to safeguard, protect, and distribute assets based on the written instructions in the trust document. The following parties are involved:
- Trustor/grantor/settlor – Person who sets up the trust.
- Trustee – Person or entity that manages the assets.
- Beneficiary – Person or entity that receives the assets. In some circumstances, successor beneficiaries are listed in the original trust document.
Let’s learn more about different types of trusts. The type of trust that is best ultimately depends on what a client needs and how they want to design the trust. It is an architecture of one’s assets and the client is the architect.
- Simple versus complex trust – A simple (non-grantor) trust requires that all income be distributed to beneficiaries annually. It cannot distribute the principal, and it cannot make distributions to charities. Any trust that is not simple is a complex trust.
- Revocable versus irrevocable trust – In a revocable trust, the grantor can revoke or amend the trust during their life. The grantor can be the trustee of the trust assets. Generally, this is not a completed gift for gift tax purposes, as the grantor has the right to amend the trust documents. This type of trust does not have to go through probate if the assets have been successfully transferred to the trust prior to grantor’s death. In an irrevocable trust, however, the grantor cannot revoke or amend the trust. It is a completed gift for gift tax purposes. The trust assets do not have to go through probate.
- Inter vivos versus testamentary trust – Inter vivos is a Latin phrase that means “while alive” or “between the living.” The trust is established during the grantor’s life. This trust can be revocable or irrevocable. A testamentary trust, on the other hand, is created by one’s will and becomes effective at death. The last will and testament should detail all the information. Upon the grantor’s death, the will goes through the probate process. Once this is complete, the trust is created, and the assets are distributed to the beneficiaries per the trust guidelines. For example, a clause may be incorporated to disburse the assets when the beneficiaries reach a certain age.
- Standby versus pourover trust – A standby trust is usually a revocable trust and stands in readiness to take and manage assets upon the occurrence of an event such as the grantor’s becoming incapacitated. As the name suggests, pourover means assets are poured over from another source – e.g., IRAs or insurance policy – to an established trust.
