Use Cases for Common Types of Trust

If you are starting the estate planning process, you may have heard that a trust is a useful legal arrangement for protecting and distributing assets. Let’s look at seven common types of trusts and how they are used. 

Note that this is a general overview and is not meant to provide specific guidance. You should seek the guidance of a professional with estate planning experience to discuss which trust, if any, may be right for your situation. 

Revocable Living Trust 

A revocable living trust offers flexibility and control over assets during your lifetime and the ability to change or revoke the trust at any time. It protects your assets if you become incapacitated and can save your loved ones’ time and money, as well as protect their privacy, by making probate unnecessary for asset transfer after you pass away. 

Examples: 

• A mother creates a revocable living trust to avoid probate, ensuring her assets transfer smoothly to her children while retaining her ability to move assets in and out of the trust as she sees fit.
• A man with a family history of Alzheimer’s disease creates a revocable living trust to ensure his nephew, who will serve as the trustee, will manage his assets if he becomes incapacitated. 

Irrevocable Trust 

While irrevocable trusts bypass the probate process, protect assets from creditors and legal judgments, and may reduce the grantor’s tax liability, they are difficult to change or cancel. Any assets that you place into this trust are permanently removed from your estate to be managed and distributed to your beneficiaries by your trustee when you pass away. 

Examples: 

• A surgeon establishes an irrevocable trust to protect a portion of her assets for her beneficiaries should she ever face litigation.
• Retirees with a sizeable estate want to leave assets to their children and grandchildren without incurring a significant federal estate tax. 

Testamentary Trust 

Testamentary trusts are established after the grantor passes away, based on instructions left in their will. A named trustee manages assets on behalf of the beneficiaries until predetermined conditions outlined in the will are met. As with other trusts, the assets do not go through probate. 

Examples:

• Parents of four young children create a testamentary trust stipulating that distributions should be made to each of their children based on the children’s ages and specific needs at the time of their passing.
• A grandmother stipulates that her grandchildren will receive portions of their inheritance at certain ages or milestones, instead of receiving a lump sum. 

Special Needs Trust 

Also referred to as a supplemental needs trust or SNT, a special needs trust is established to benefit people with a physical or mental disability or a chronic illness. It is intended to manage assets for an individual’s benefit while not compromising access to government benefits. The funds in the trust are to be used for those goods and services that government benefits will not cover. Keeping the funds inside the trust helps ensure that the beneficiary can still qualify for government assistance. 

Examples: 

• A couple establishes a SNT for their daughter with cerebral palsy that would cover her extra care without reducing her eligibility for government benefits provided by Social Security, Supplemental Security Income, or Medicaid.
• A woman who cares for her brother with Down Syndrome establishes a SNT that will ensure he still has access to resources beyond what public benefits could provide if she passes away before him. 

Spendthrift Trust 

Whether revocable or irrevocable, a spendthrift trust releases assets over time on a schedule you set, which can provide income to your beneficiaries while protecting trust assets from irresponsible spending. 

Examples: 

• A couple creates a spendthrift trust for their son, who’s had financial trouble over the years due to poor decisions and reckless spending. The trust provides a structured income while safeguarding the assets from creditors.
• A father creates a spendthrift trust for a daughter who has previously struggled with substance abuse, including conditions that the assets must be released only for education, healthcare, or housing expenses – protecting the assets and providing for her welfare. 

Charitable Trust 

You can leave your assets to a tax-exempt nonprofit or charitable organization close to your heart with either a charitable lead trust or a charitable remainder trust. Both types allow you to provide tax-efficient support for a charity or nonprofit, while creating potential income for yourself and your heirs. 

Examples: 

• A couple whose child received lifesaving treatment at a nonprofit hospital creates a charitable remainder trust, securing lifetime income and future support for the hospital’s continued service to other families.
• A longtime nonprofit volunteer and donor establishes a charitable lead trust, ensuring annual donations to the organization with a remainder interest to their children, promoting continued philanthropy while planning for the family legacy. 

Dynasty Trust 

Designed to preserve generational wealth and protect assets from gift and estate taxes, creditors, and divorce claims, dynasty or perpetual trusts are irrevocable trusts for which the grantor sets the rules. After you have funded the trust, no one can change its terms, and most grantors appoint a bank or other financial institution as the trustee. New generations can assume the beneficiary role throughout its duration. State laws may impact the use of dynasty trusts. 

Examples: 

• An older couple puts most of their business assets, real estate holdings, and investment portfolio into a dynasty trust, bypassing certain taxes and ensuring their family will receive financial support for future generations.
• A philanthropist establishes a dynasty trust that will benefit current and future generations of his family. The trust will help pay for higher education and will match the donations family members make to several charitable causes, thereby carrying on his legacy of prioritizing education and generosity. 

Explore Your Options 

It’s never too early to start planning. Trusts can be valuable tools in estate planning, but you should explore all of your options with a certified professional.

Bank of Colorado is not able to offer legal or tax advice.