Different Types of Trusts Explained

When it comes to establishing a trust, there are a number of different kinds of trusts to choose from. There are also many different types of trusts that beneficiaries may have to deal with as a result of a loved one’s passing. Below, we’ll go through the different types of trusts, explain how they work, and show you the benefits that these different trusts can offer. 

If you are considering establishing a trust, contact a Maryland living trust lawyer at The Law Offices of Raymond Brown today. We can help ensure that your personal property is protected, managed, and distributed according to your wishes. Call us at (443) 554-9944 to schedule an initial case evaluation with Attorney Raymond Brown regarding your potential trust.  

What is a Trust?

A trust is a legal arrangement in which assets are transferred from one party to another, usually a spouse or child. Trusts are established to provide legal protection for a person’s assets and ensure those assets are distributed according to their wishes, even after their death. 

Trusts can be used for a variety of purposes, including estate planning, securing the financial future of a beneficiary, or donating to charity. They can also save time and reduce paperwork by avoiding the probate process. In some cases, trusts can also avoid or reduce estate taxes that the beneficiary must pay on their inheritance. 

How Do Trusts Work?

When creating a trust, the person or entity who establishes the trust, known as the trustor or grantor, must transfer assets to another party, known as a trustee. The trustee must then hold onto and manage the trust’s assets for the benefit of the trust’s beneficiaries. These are the people who are designated to receive the benefits of this trust, such as the trustor’s child, grandchild, surviving spouse, or other designated party.

While the trustee often has a number of different powers, the trust is ultimately governed by terms set out in a trust agreement, which dictate how and when the assets are to be distributed to the beneficiaries.

What is a Trust

Types of Trusts

There are many different types of trusts that are available for people to utilize, many of which serve specific purposes that can help in unique financial and personal situations. Below are some of the different kinds of trusts that people can establish, as well as an explanation of what purpose they serve. 

Revocable Living Trust

A revocable living trust is an estate planning tool where an individual (the grantor) places assets into a trust which they can alter or revoke during their lifetime. With a revocable trust, the grantor can assign themselves as the trustee, allowing for greater asset management and control.

People often establish revocable trusts to avoid probate, ensure privacy after death, and manage their assets in case of incapacity while still having the flexibility to modify the trust as their situation or intentions change.

Irrevocable Trust

An irrevocable living trust is a type of trust where the terms cannot be easily modified, amended, or terminated once it is created. This trust serves the purpose of permanently transferring assets out of the grantor’s estate, thereby reducing estate taxes and protecting assets from creditors and legal judgments. 

Many people opt for irrevocable trusts for estate tax advantages and asset protection. An irrevocable trust can also ensure that the grantor’s estate is taken care of according to their wishes, all while ensuring long-term financial support for their beneficiaries.

Testamentary Trust

A testamentary trust is a type of trust that is created as per the instructions laid out in a person’s Last Will and Testament, and it only comes into effect after the person’s death. Its purpose is to manage and distribute the deceased’s assets according to specific terms and conditions, providing a level of control over how beneficiaries receive their inheritance. 

Testamentary trusts are often established to ensure the deceased’s assets are protected and used in a manner they would have preferred, using their will as a guide. This can help protect assets for beneficiaries who might not be ready or able to manage a large inheritance, such as minor children or those with special needs.

Charitable Trust

A charitable trust is a type of trust created to benefit a particular charitable organization or to benefit the public in general, typically offering tax advantages to the donor. Its primary purpose is to ensure that assets are used for charitable, religious, educational, or other activities serving the public interest. 

There are a few different kinds of charitable trusts, including charitable remainder trusts and charitable lead trusts. A charitable remainder trust, or charitable remainder annuity trust, is a type of trust where a donor contributes assets and receives income from these assets for a set period. After that period, the remaining assets are donated to a designated charity. 

A charitable lead trust is a trust that provides a fixed amount or a percentage of the trust’s assets to a designated charity for a set period. After that period, the remaining assets pass to non-charitable beneficiaries, like family members.

Charitable Trust Creation in Maryland

Special Needs Trust

A special needs trust is a type of trust specifically designed to benefit individuals with disabilities without jeopardizing their eligibility for public assistance programs like Medicaid or Supplemental Security Income (SSI). This trust allows assets to be held and managed on behalf of the beneficiary, providing for their additional needs while not disqualifying them from essential government benefits. 

Spendthrift Trust

A spendthrift trust is a type of trust designed to protect the beneficiary’s assets from their own potential recklessness, creditors, or poor financial management. It grants an independent trustee the authority to make decisions about how the assets in the trust are distributed to the beneficiary or beneficiaries, often in a controlled manner. 

Life Insurance Trust

An irrevocable life insurance trust is a trust specifically created to hold onto a person’s life insurance policy, with the trust itself designated as the beneficiary. The main purpose of irrevocable life insurance trusts is to exclude the life insurance proceeds from the insured’s estate for tax purposes. This can potentially save beneficiaries a significant amount in estate taxes, ensuring that the full amount of the insurance payout goes directly to them.

Bypass or Credit Shelter Trust

A credit shelter trust, also known as a bypass trust or AB trust, is a type of trust that allows couples to minimize estate taxes by utilizing each spouse’s estate tax exemption. Upon the death of one spouse, assets up to the exemption limit are placed into the trust. The remaining spouse will have certain rights to the trust’s income and principal, but not outright ownership. 

After the surviving spouse passes, both of their assets will be distributed in accordance with their will or trust. Credit shelter trusts can help provide financial support to a surviving spouse while also preserving certain assets for their future beneficiaries.

QTIP Trust (Qualified Terminable Interest Property Trust)

Qualified terminable interest property trusts (aka QTIP trusts) are very similar to credit shelter trusts but have more restrictions on what trust assets the surviving spouse can access. This type of trust allows the grantor to better control the distribution of assets after their death. A QTIP trust can ensure that the person’s surviving spouse is taken care of financially, as well as ensure that the grantor’s designated heirs eventually inherit the estate.

Qualified Personal Residence Trust (QPRT)

A qualified personal residence trust (QPRT) allows an individual to transfer their home or vacation property to a trust for a specified term, while retaining the right to live in the property. After the term expires, the property passes to the beneficiaries, typically the grantor’s children, at a reduced gift tax value. 

People use QPRTs as a strategy to reduce estate taxes, as it removes a high-value asset from their estate, while allowing them to continue living in the home. This gives a person or couple the chance to pass the property to their heirs at a lower tax cost.

Grantor Retained Annuity Trust (GRAT)

Grantor-retained annuity trusts (GRATs) are estate planning instruments where an individual transfers assets to a trust and receives a fixed annual payment (annuity) for a set period. After this period, the remaining assets in the trust pass to the beneficiaries, typically the grantor’s heirs. 

People use GRATs to transfer appreciating assets to beneficiaries at a reduced gift tax cost, making it an attractive option for transferring a large amount of wealth to heirs with minimal taxes.

Types of Trusts

Generation-Skipping Trust (GST)

Generation-skipping trusts (GSTs) are legal entities used in estate planning to pass assets directly to grandchildren or more remote descendants, bypassing the grantor’s children. The primary purpose of a GST is to minimize estate taxes that would apply if assets were first transferred to the children and then to the grandchildren. 

People use GSTs as a strategy to preserve wealth across multiple generations, effectively reducing the tax burden and ensuring that a substantial portion of their estate benefits future generations.

Totten Trust

A totten trust, also known as a “payable-on-death” account, is a simple, informal type of trust created when an individual places money in a bank account and names a beneficiary who will receive the funds upon the account holder’s death. People often use totten trusts to transfer assets and bypass the probate process in a straightforward way, since they can be established without the need for a formal trust or will.

Asset Protection Trust

An asset protection trust is a type of trust designed to shield an individual’s assets from creditors, legal judgments, or other financial risks. This trust is typically established in a jurisdiction with favorable asset protection laws, making it difficult for creditors to access the assets within the trust.

People create asset protection trusts to safeguard their wealth against potential lawsuits, creditors, or financial uncertainties, thereby ensuring long-term asset security for themselves and their beneficiaries.

Dynasty Trust

A dynasty trust is a long-term trust created to pass wealth across multiple generations while minimizing estate taxes and protecting assets from beneficiaries’ creditors. The trust can last for many decades, often beyond the grantor’s lifetime, and is designed to avoid the repeated taxation of wealth as it passes down through generations. 

Individuals establish dynasty trusts to preserve family wealth over an extended period, often to maintain control over the distribution of assets and to provide a lasting financial legacy for future generations.

Medicaid Trust

A Medicaid trust is a form of irrevocable trust designed to help individuals qualify for long-term care under Medicaid while preserving their assets. By transferring assets into the trust, they are not counted as personal assets when determining Medicaid eligibility, thus helping individuals meet the program’s strict asset limits. 

People establish Medicaid trusts to ensure they can receive Medicaid benefits for long-term care, such as nursing home expenses, without depleting their remaining funds.

Medicaid Trusts

Land Trust

A land trust is a type of trust in which real estate is the primary asset held and managed by the trustee. The main purpose of a land trust is to maintain privacy surrounding the land’s ownership, simplify the transfer of title, and protect the land from certain legal situations such as judgments or liens. 

People often use these types of trusts to maintain anonymity in real estate ownership, facilitate estate planning, or as a tool for conservation efforts, allowing for the preservation of land in its natural state.

Blind Trust

A blind trust is a trust where the beneficiaries, and often the grantor, have no knowledge of the assets held within the trust and no right to intervene in their management. It is managed by an independent trustee who transfers assets and manages investment decisions without the influence of the beneficiaries or other parties. 

People often establish blind trusts to avoid conflicts of interest, particularly in situations where public figures or politicians need to demonstrate that their decision-making is not influenced by personal financial interests. 

Constructive Trust

A constructive trust is not like most other types of trusts. It’s more of a court-imposed remedy for situations where someone has wrongfully obtained or withheld property that rightfully belongs to another. 

The court forces the holder of the property to hold it as a trustee, with the obligation to transfer it to the rightful owner or to use it for a designated purpose. The purpose of a constructive trust is to correct wrongdoing or unjust enrichment, ensuring that the property is back in the right hands.

Pet Trust

A pet trust is a legal arrangement that ensures continued care and financial support for a pet after the owner’s death or incapacity. The trust specifies a caretaker for the pet, usually one of the owner’s family members, and allows them to allocate funds for their pet’s care and provide instructions on how the pet should be cared for. 

People create pet trusts to ensure their beloved pets are well taken care of in their absence, guaranteeing not just financial support but also the loving care and attention the pet needs.

Creating a Trust in Maryland

Do I Need an Attorney to Create a Trust?

While it is possible to create a trust without an attorney, it’s recommended that you find an experienced trust attorney to help you through the process. Trusts can be complex legal instruments, and an attorney can help ensure that the trust is properly set up to meet your specific goals and legal requirements. 

An attorney’s guidance is particularly valuable for navigating the nuances of trust law, tax implications, and the estate planning process. Doing it yourself without legal guidance can lead to mistakes or oversights that can undermine the trust’s purpose or effectiveness.

Attorneys can also provide you insight into what types of trusts would work best for your unique financial situation and can even provide you with guidance on how to fund your trust. A local Maryland estate planning lawyer like Attorney Raymond Brown can help you establish a trust that will allow you and your loved ones to reap the maximum benefits possible.

Interested in Creating a Trust? Call Maryland Estate Planning Attorney Raymond E. Brown Today

Estate planning can be extremely difficult, especially when you add things like trusts to the mix, but planning for the future can be incredibly beneficial for you and your loved one. Whether you want to add a trust to your existing estate plan or you’re starting the estate planning process from scratch, The Law Office of Raymond E. Brown is here to help. 

We are proud to provide the residents of Annapolis, MD, and the greater Anne Arundel County with estate planning and trust establishment services to ensure their wishes are carried out, even after they are gone. Call (443) 554-9944 or contact us online to schedule a consultation with an Annapolis estate planning attorney at our firm today.

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