Trusts can be incredibly valuable estate planning tools, but if you’re like most people, you’ve heard the term, but may not understand what a trust is or the differences between the types of trusts. We’re here to help. Read the information below, and if you still have questions, or want help creating a trust, contact a Fifth Third Bank advisor.
What is a Trust?
A trust is an agreement allowing a third party to hold onto property for the benefit of another. While there are many different types of trusts, each has the same four components:
- The person who creates the trust and places property within the trust. You may also hear a grantor referred to as a “donor.”
- The person or entity who holds on to the property for the benefit of the beneficiary(ies).
- The money or other form of property put into the trust. You may hear of the money and other property included in the trust as the “trust fund.” The principal of a trust varies depending on the type of trust used.
- The person(s) who benefits from the trust.
Classifications of Trusts
While all trusts are comprised of the same four basic elements, they don’t all function the same way. Because of these distinctions, you may see trusts classified in different ways.
Living Trust vs. Testamentary Trust
This classification describes when a trust becomes effective. A living trust, or what is also referred to as an inter-vivos trust, becomes effective during the grantor’s lifetime. A trust created in a Last Will and Testament is classified as a testamentary trust. Testamentary trusts go into effect after the grantor—or testator—passes away.
Revocable Trust vs. Irrevocable Trust
Another classification is irrevocable or revocable. If the trust is revocable, the grantor may reserve the right to make changes to the trust once it is effective. If it is irrevocable, the terms or provisions of the trust cannot be changed once effective. It is important to note all testamentary trusts are irrevocable trusts, as they only become effective upon the death of the grantor.
Common Types of Trusts Used in Estate Planning
- Charitable Lead Trust – Designed to provide trust payments to a charity for a fixed set of years. At the end of the term, the remaining assets within the trust pass to non-charity beneficiaries.
- Charitable Remainder Trust – Designed to provide trust payments to non-charity beneficiaries for a fixed time. Upon the end of the term, all remaining trust assets pass to one or more qualifying charitable organizations.
- Grantor Retained Annuity Trust – Allows the grantor to place an income-producing asset (such as stock or a family business) in a trust and receive income from the trust for a set period of time. At the end of the term, the trust asset transfers to the beneficiary(ies).
- Irrevocable Life Insurance Trust – Removes life insurance proceeds from the estate to provide those benefits to beneficiaries.
Creating an effective and enforceable estate plan can be complicated.