Forming a Trust

End of Life Management Toolkit #7 | by Team Passare and Robert L. Shepard

4. Comparing Trust Types

Living Versus Testamentary Trusts may be created by a person either during their life, or after their death through provisions indicated in the person’s will.

Living Trust
  • It can be created by a person during his or her lifetime
  • It may be used to implement estate tax planning techniques that shelter assets from the federal estate tax with a credit shelter trust
Testamentary Trust
  • It can be created after death through provisions in a decedent’s last will and testament
  • It may be used to implement estate tax planning techniques that shelter assets from the federal estate tax with a credit shelter trust

Revocable versues Irrevocable Trusts

Revocable Trust
  • It can be modified or even completely revoked by the person creating the document.
  • It is a flexible tool for estate planning because the settlor can c hange the terms of the revocable trust to meet the needs of the evolving family.
  • A common advantage is that the assets in the trust avoid probate, while the settlor retains control over the property.
Irrevocable Trust
  • It cannot be changed after it is created.
  • Since it cannot be changed, it is critical that the language of the trust does what you want it to do before it is signed and funded.
  • Normally, the creation and funding of an irrevocable trust is a taxable event.
  • Irrevocable trusts are used to remove assets from a settlor’s estate through transfers of insurance or other property for the beneficiaries, who are usually younger generation family members.
  • In some circumstances, an irrevocable trust may also be used to insulate assets from creditor liability.

TIP: Every revocable trust becomes irrevocable upon the death of the settlor.

Funded versues Unfunded Trusts Trusts can also be characterized as either funded or unfunded.

Funded Trust
  • A funded trust has assets beyond than the nominal $1.00 titled in the name of the trust.
  • Revocable trusts can be funded with assets any time. There are varying reasons to fund a trust during life, rather than waiting to fund the trust through provisions in your will.
    For example, an individual may fund a trust if they want the trustee to manage the assets placed into the trust.
  • Self-trusteed trusts are funded if the settlor (who is also the trustee) wants to avoid the probate process to transfer those assets at the death of the settlor
Unfunded Trust
  • An unfunded trust is a trust with some nominal property typically $1.00 as its assets; since some type sort of corpus is typically required to have a valid trust.
  • Unfunded trusts become funded when a decedent dies and the property passes to the trust through the will.
  • The property that is ultimately transferred into the trust must first pass through the probate process to get into the trust.

Self-Trusteed versues Third-Party Trusteed Trusts

Self-Trusteed Trust
  • A self-trusteed trust is a trust with the settlor also serving as the initial trustee
  • This permits a person to create a trust and fund it with assets, while not having to give up control over those assets.
  • A self-trusteed trust document typically provides that upon the death, resignation, or incapacity of the settlor / initial trustee, a successor trustee takes over
  • Self-trusteed trusts are funded if the settlor (who is also the trustee) wants to avoid the probate process to transfer those assets at the death of the settlor
Third-Party Trusteed Trust
  • A third-party trusteed trust is a one that is created with someone other than the settlor, such as another individual, or, a corporate entity, such as a bank trust department, as the trustee.
  • This independent, third-party trustee is charged with the fiduciary responsibility of managing the trust for the benefit of the beneficiaries.
Now, take a few minutes to answer these questions about forming a trust:
  1. What are the differences between a revocable trust and an irrevocable trust? Which would be the most appropriate trust for your situation?
  2. What are the differences between a self-trusteed trust and a third-party trusteed trust? Which would be the most appropriate trust for your situation?
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