**Friendly reminder**

All Norway Savings Bank locations and the Customer Care Center will be closed on Wednesday, June 19, 2024, in recognition of the newest Federal holiday, Juneteenth. Normal business hours will resume on Thursday, June 20, 2024.

/ Resources / Wealth Management Articles / What Are the Different Types of Trusts?

What Are the Different Types of Trusts?


Protecting Your Assets and Your Loved Ones

If you’re starting to think about comprehensive estate planning and how to protect your assets (now and after you’re gone), trusts are an essential tool to consider. Trusts offer numerous benefits, including asset protection, privacy, and control over distribution, and are a popular choice for individuals seeking comprehensive estate planning solutions. 

In this article, we’ll explore the different types of trusts and their unique features to help you make informed decisions about your estate planning needs.

Check out our Financial Calculators

What is a trust?

A trust is a legal arrangement where a grantor (the person who creates the trust) transfers assets to a third party, known as a trustee (the person or entity responsible for managing the trust), for the benefit of one or more beneficiaries. 

Trusts can be arranged in different ways and can specify exactly how and when the assets pass to the beneficiaries. Trusts usually avoid probate and are commonly used for various estate planning and asset protection purposes.

Key components of a trust

While trusts come in a variety of forms, they all share some key components. Take a look:

Grantor/Settlor: The person who creates the trust and transfers their assets into it. The grantor defines the terms of the trust and determines how the assets will be managed and distributed.

Trustee: The individual or entity appointed by the grantor to manage the assets held in the trust and carry out the trust’s instructions. The trustee has a fiduciary duty to act in the best interests of the beneficiaries and must follow the guidelines outlined in the trust document.

Beneficiary: The person or group of individuals who will receive the benefits from the trust. Beneficiaries can be individuals, organizations, or even charitable causes.

Trust document: A legal agreement that outlines the terms and conditions of the trust. It specifies the assets included, the rights and responsibilities of the trustee, the distribution of assets to beneficiaries, and any other relevant instructions.

What is the purpose of a trust?

The purpose of a trust is to provide individuals with a flexible and effective means of managing their assets, protecting their wealth, and providing for their loved ones according to their unique needs, goals, and wishes. Trusts can be customized to address various scenarios, making them an integral part of comprehensive estate planning and asset management.

Some of the primary purposes of a trust include:

  • Estate Planning
  • Asset Protection
  • Minimizing Estate Taxes
  • Providing for Minor Children
  • Supporting Special Needs Beneficiaries
  • Charitable Giving
  • Family Wealth Preservation
  • Managing Business Interests

Revocable vs irrevocable trusts

Trusts can be categorized into two main types based on their revocability, meaning whether or not they can be changed or voided. Trusts can be either revocable or irrevocable.

Revocable trust 

A revocable living trust is a versatile estate planning tool that allows the grantor to maintain complete control over their assets during their lifetime. As the name suggests, it is “revocable,” meaning the grantor can amend or revoke the trust at any time. With a revocable living trust, the grantor can transfer assets into the trust’s ownership, and they can also act as the trustee. This setup enables seamless management of assets while ensuring that beneficiaries are designated to receive the assets upon the grantor’s death.

The primary advantage of a revocable living trust is that it avoids probate, the often time-consuming and costly process of validating a will. By sidestepping probate, the trust’s assets can be distributed to beneficiaries privately and efficiently, minimizing the potential for disputes and reducing administrative expenses.

Irrevocable trust 

Unlike revocable trusts, irrevocable trusts cannot be altered or revoked once established, emphasizing their permanence and commitment to the beneficiaries. Once assets are transferred to an irrevocable trust, they are no longer considered part of the grantor’s estate for tax and legal purposes.

One of the significant benefits of an irrevocable trust is its potential for estate tax reduction. Since the assets are no longer owned by the grantor, they are not subject to estate taxes upon the grantor’s passing. Additionally, irrevocable trusts can provide asset protection, shielding them from creditors or legal claims.

Living vs testamentary trusts

Living trusts and testamentary trusts are two distinct types of trusts used in estate planning, each serving different purposes and offering unique benefits. 

A living trust is established during the grantor’s lifetime and allows the grantor to retain control over the trust assets. It provides a seamless mechanism for asset management during the grantor’s lifetime and facilitates the efficient transfer of assets to beneficiaries upon the grantor’s death, avoiding probate. 

In contrast, a testamentary trust is created through the grantor’s will and only takes effect upon their death. It allows the grantor to dictate how assets will be managed and distributed after their passing, addressing specific needs such as providing for minor children, supporting individuals with disabilities, or benefiting charitable causes. While living trusts offer privacy and flexibility, testamentary trusts provide posthumous control and guidance over the distribution of assets. 

Specific types of trusts

Trusts can be created for specific purposes. Here are some of the most common.

Marital Deduction Trust

A Marital Deduction Trust is a type of trust used in estate planning to take advantage of the marital deduction for federal estate tax purposes in the United States. The marital deduction allows an individual to transfer an unlimited amount of assets to their spouse during their lifetime or upon their death without incurring any federal estate or gift taxes. This deduction effectively postpones the payment of estate taxes until the surviving spouse’s death.

The primary purpose of a Marital Deduction Trust is to provide for the surviving spouse while still allowing the grantor to control the ultimate distribution of assets, particularly after the surviving spouse’s passing. It ensures that the assets transferred to the trust will qualify for the unlimited marital deduction, thereby reducing the grantor’s estate tax liability.

The use of a Marital Deduction Trust is especially valuable in situations where the combined value of a married couple’s assets exceeds the federal estate tax exemption limit. By establishing a Marital Deduction Trust, a portion of the grantor’s assets can pass to the surviving spouse without triggering estate taxes, thus preserving the full estate tax exemption for the deceased spouse. This, in turn, maximizes the overall wealth transfer to the grantor’s intended beneficiaries and minimizes the estate tax liability.

Qualified Terminable Interest Property Trust (QTIP)

Similar to a Marital Deduction Trust, a Qualified Terminable Interest Property Trust is a specialized type of trust used in estate planning to benefit a surviving spouse. The primary purpose of a QTIP trust is to take advantage of the marital deduction for federal estate tax purposes, allowing the grantor to provide for their surviving spouse while minimizing potential estate tax liability.

However, there are subtle differences between the two types of trusts. QTIP Trusts are instituted when a spouse dies. The assets of the deceased spouse can be used by the surviving spouse until they die, at which point, the assets go to the beneficiaries that were named by the initial benefactor. In addition, the surviving spouse can only use the trust’s profits when in their control, while the originally intended beneficiaries are able to use the principle investments as well.

The QTIP trust is especially valuable when one or both spouses have children from previous marriages or want to ensure that their assets ultimately pass to specific beneficiaries, such as children from their first marriage. By using a QTIP trust, the grantor can provide for the surviving spouse during their lifetime while maintaining control over the final disposition of the assets.

Qualified Domestic Trust

A Qualified Domestic Trust (QDOT) is a specialized trust designed to benefit a surviving non-citizen spouse in the United States. The primary purpose of a QDOT is to allow a non-citizen surviving spouse to take advantage of the marital deduction for federal estate tax purposes, similar to how a Marital Deduction Trust benefits a surviving U.S. citizen spouse.

The marital deduction allows a U.S. citizen to transfer an unlimited amount of assets to their spouse during their lifetime or upon their death without incurring any federal estate or gift taxes. However, before the enactment of the QDOT rules, this unlimited marital deduction was not available for non-citizen spouses.

Bypass Trust

A Bypass Trust is an estate planning tool designed to help married couples reduce or eliminate estate taxes upon their passing. It allows each spouse to utilize their individual federal estate tax exemption, effectively “bypassing” the taxation on a portion of their combined assets.

When a spouse passes away, their assets can be transferred into the Bypass Trust, up to the amount of their available federal estate tax exemption at the time of their death. The remaining assets go directly to the surviving spouse or into another trust, typically referred to as the “Marital Trust” or “A Trust,” which qualifies for the unlimited marital deduction.

Some couples choose to use Bypass Trusts in their estate plans due to their benefits and flexibility in providing for both the surviving spouse and future generations.

Spendthrift Trust

A Spendthrift Trust is a valuable tool for protecting trust assets from creditors and ensuring that beneficiaries receive financial support without the risk of losing the assets to their own financial mismanagement or external legal claims.

The primary purpose of a Spendthrift Trust is to provide financial support and security to the beneficiaries while preventing them from mismanaging or squandering the trust assets and shielding those assets from potential creditors.

Spendthrift trusts are subject to state laws, and the level of protection they offer can vary based on jurisdiction. Not all states recognize the same degree of creditor protection for spendthrift trusts and also may require certain conditions be met, so it is essential to consult with an experienced estate planning attorney to understand the specific laws in your state and tailor the trust accordingly.

Special Needs Trust

A Special Needs Trust plays a vital role in ensuring that individuals with special needs receive the care and support they need, while protecting their eligibility for essential government benefits, such as Medicaid and Supplemental Security Income (SSI). 

Creating a special needs trust involves careful consideration of the beneficiary’s unique circumstances and future needs, making it essential to work with an experienced estate planning attorney to design and establish the trust properly.

Dynasty Trust

A Dynasty Trust is a long-term, irrevocable trust designed to benefit multiple generations of a family. The primary goal of a dynasty trust is to preserve and pass on wealth while minimizing estate taxes across several generations.

It’s important to note that dynasty trusts are subject to state laws, and not all states permit trusts that last for multiple generations. Additionally, some states may impose a “rule against perpetuities,” which limits the duration of trusts. 

Charitable Remainder Trust

For individuals with philanthropic inclinations, charitable trusts present an excellent way to leave a lasting legacy while obtaining certain tax advantages. Charitable trusts are designed to benefit charitable organizations or causes while potentially providing the grantor with tax deductions.

There are two primary types of charitable trusts: charitable remainder trusts (CRT) and charitable lead trusts (CLT). A CRT allows the grantor or other designated beneficiaries to receive income from the trust for a specified period, after which the remaining assets are transferred to the designated charity. A CLT, on the other hand, works in the opposite way – it provides income to a charitable organization for a set period, with the remaining assets ultimately passing to non-charitable beneficiaries.

Putting it all together

Trusts offer flexibility, asset protection, and tax benefits, making them valuable tools for comprehensive estate planning to protect assets and provide for loved ones after you’re gone. Whether you choose a revocable living trust for flexibility during your lifetime or an irrevocable trust for tax advantages, understanding the various types of trusts available can help you make informed decisions aligned with your unique circumstances and estate planning goals. 

It’s important to note that tax laws are subject to change, and estate planning strategies may need to be adjusted accordingly. So, if you’re considering a trust or any other estate planning technique, you should seek advice from an experienced estate planning attorney or financial advisor.  

About Norway Savings Asset Management

At Norway Savings Asset Management Group, we manage trusts and investments for people like you. We’re more than just financial advisors—we’re family fiduciaries—which means we’re both legally and ethically bound to put your interests first. We take the responsibility of safeguarding your assets incredibly seriously. We’re here to make sure your story lives on.

*This article is intended for educational purposes only and should not be construed as legal or tax advice.