For many, creating a trust is simply part of the estate planning process. Others, though, aren’t quite sure a trust is the right option to protect their assets. If you’re one of those people, it’s important to know that there are different types of trusts Florida estate law recognizes, and selecting the right one to fit your asset planning strategy is crucial. So, what are the different types of trusts in Florida?
What Exactly is a Trust?
Trusts are popular in estate planning as they allow for the transfer of assets to the beneficiary or beneficiaries without too many hassles. Before you learn more about the types, some definitions may be helpful. A trustee is a person who holds your assets in the trust. When you create a trust, you are often referred to as a benefactor, grantor, or trustor. The person who gets the assets is called a beneficiary. There are many different advantages to creating a trust. First, and maybe most importantly, it helps your assets avoid probate. Any assets you list in your will pass through probate, which can be fairly expensive. It’s also pretty time-consuming for beneficiaries, as it can take months to actually gain access to assets in a will. Wills are also public documents. Trusts, though, aren’t. The contents of a trust are completely private. More than that, though, assets placed in a trust are protected from creditors. The assets in your estate, however, are not. Finally, trusts do offer you the ability to have lower estate taxes, leaving more to your heirs.
What Are the Different Types of Trusts?
There are different types of trusts, and even within a trust, many arrangements can be made to best meet your needs. At the very basic level, there are two kinds of trusts – living trusts and testamentary trusts. The definitions here are pretty simple. You create living trusts while you’re alive. Testamentary trusts are those set up after your death. The terms of the testamentary trust are documented in your will but can be changed at any time up until your death. The testamentary trust is generally simpler and offers more flexibility compared to a living trust.
Within those two types, though, are two other kinds of trusts: revocable and irrevocable trusts. If you’ve created a living trust, you likely created a revocable trust. That means it can be changed during your lifetime. An irrevocable trust, though, can’t be changed once created. All income from the assets is no longer taxable during your lifetime, and the assets are not taxable to the estate after you die. The goal of this kind of trust is usually to provide creditor protection. Since irrevocable trusts cannot be changed after they are created, you have to be absolutely sure what your financial goals are before making one.
Within those two kinds of trusts come all of the subcategories. What are the different types of trusts? Each comes with a number of different benefits and restrictions.
- Charitable Trust: This is an irrevocable trust that is created to simultaneously benefit the grantor, the beneficiaries, and a qualified charity under stipulations established by the IRS. The two main types of charitable trust include charitable lead trusts and charitable remainder trusts. With both of these trusts, you can donate your assets to your favorite charities and experience some tax benefits.
- Qualified Terminable Interest Property Trust: Sometimes called QTIP, this is a trust created to provide income for the surviving spouse. But in this case, you still retain control over the assets after spousal death. A QTIP is ideal when there are beneficiaries from a previous marriage; for example, you may set up a trust for your ex-spouse and children from a previous marriage, but still retain control over the assets.
- Grantor Retained Annuity Trust: This is an irrevocable trust that is created to lower taxes on big financial gifts to beneficiaries and family members. This trust only has a short duration. You have to pay taxes on the assets when the trust is created but you receive an annual annuity payment during the duration of the GRAT. When the term of the trust expires, the beneficiaries become recipients of all the residual assets.
- Irrevocable Life Insurance Trust: In general life insurance policies do not go through probate. However, for some, a life insurance trust is set up for tax purposes. At the same time, it enables the quick transfer of the funds immediately to the beneficiary after you’ve died. With this type of insurance trust, the wealth is transferred to successive generations without being taxed. However, since it’s an irrevocable trust, you can’t make any alterations to the beneficiaries after its creation.
- Irrevocable Funeral Trust: This is a trust that is utilized to cover funeral and burial costs. In most cases, the trustee will be the funeral home owner. Funeral trusts are funded with bonds, cash, or life insurance, and state laws do vary on how the payment should be made; hence it is important to consult with an estate attorney.
- Spendthrift Trust: This particular trust is designed to protect irresponsible spending by the beneficiary. For example, you may have a child who just isn’t good with money and typically spends far too much on unnecessary expenses. Hence in such a case, you can set up a spendthrift trust. While the assets in the trust do belong to the beneficiary, he or she is not at liberty to withdraw the money and spend it freely. In addition, the beneficiary’s creditor will not have direct access to the trust. The trustee will then use his or her discretion to determine how the trust money is used. For example, the trustee may decide to give the beneficiary a certain amount of money each week/month and may direct what items the money can be spent on.
- Special Needs Trust: Sometimes the trustor may have a member of the family who has special needs or is disabled and will require financial assistance for the rest of his or her life. Today, a special needs trust can be set up so that when after you’ve passed, the assets will be transferred to the special needs individual. The special needs individual may be a spouse, child, sibling, or an elderly parent who is not able to provide for themselves. Again, a trustee will oversee how the money is distributed to the special needs individual(s).
- Generation-Skipping Trust: This type of trust is used to leave assets to grandchildren instead of your children. For example, if you know your children are well provided for, you may decide to bypass them and give the assets to your grandchildren. This way when you die, the assets are directly transferred to the grandchildren without any hassles.
- Totten Trust: This is also referred to as a trust that is payable on a death account. A Totten trust enables the beneficiary to directly receive the trust assets after you pass. However, while you’re still alive, you may withdraw or add funds from the trust. You can also change the name of the beneficiary if necessary.
- Spousal/Marital Trust: While in most cases, the surviving spouse has legal rights to the estate after one spouse dies, sometimes things may not always be clear, especially if the family is complex and the deceased spouse had several marriages and mistresses. In such a case, you may make a spousal trust to ensure that the living spouse is cared for after his or her death.
- Pet Trust: Many people want to provide financial support for as long as the pet is alive. A pet trust is the best way to do that. Typically a trustee will ensure that your pet’s needs are continually met through the payments from this trust.
- Asset Protection Trust: This is created to protect your assets from creditors and lien holders. This type of trust is usually created in a foreign country, but in most cases, the assets do not have to be transferred to that country. The asset protection trust is irrevocable for 3-7 years and once there is no risk from creditors, the assets are returned to the grantor.
Making the Right Trust Choice
A trust is a valuable tool for estate planning. It has many benefits but it is important to understand that creation of a trust may not be applicable to everyone. So, hopefully, you now know the answer to ‘what are the different types of trusts?’ If you think a trust might be the right choice for you, consult with our estate attorney who can review with you the benefits of the different trusts and how you can benefit from them. To learn more, contact us today.