All Trusts are created for three basic reasons:
There are two basic kinds of trusts: the Intervivos Trust, which is also known as a Living Trust, and the Testamentary Trust. In every trust, there are at least three types of participants:
A living trust is a trust that is funded during the lifetime of the decedent. A living trust takes effect when it is executed by the settler and the property is transferred into the trust. A common mistake often made with living trusts is that the settler fails to fund the trust. If the trust is not funded, it is essentially worthless. A Living Trust allows you to provide for your needs in the event you become unable to manage your affairs. It also is a popular estate planning tool, in part, because it may allow you to avoid probate upon your death. Living trusts can be established as a revocable trust or an irrevocable trust.
Revocable Living Trusts: A revocable living trust is a living trust that is established during the lifetime of the settler (the individual who forms and finances the trust) and can be revoked at any time. A revocable living trust is usually designed to help avoid probate. For example, an individual may establish a revocable living trust that is funded with their assets including bank accounts, real estate, and other property. Property listed in the trust passes to the beneficiaries at the time of the settler’s death without going through the probate process. Given that the trust is revocable, the settler may remove assets from the trust and may revoke the trust at any time before death or incapacity. A revocable living trust does not need its own tax identification number so long as the settler is alive and either the settler or his/her spouse serve as the Trustee. To be given full legal effect upon the death of the settler, the trust document must be properly executed with the same formalities as a will.
Irrevocable Living Trusts: In an irrevocable trust, the settler has much less flexibility. An irrevocable living trust is a trust that goes into effect during the settler’s lifetime and cannot be revoked. The settler may not remove assets from it or revoke it and in effect loses control over many aspects of the trust. The terms of the living trust are typically set forth in a written document. The trust document does not need to be recorded in public records or filed with any government agency. It is, therefore, a relatively private document between the parties. This type of trust is usually utilized in order to reduce the tax implications on property transfers. However, there are other common uses for irrevocable living trusts, such as to help the settlor qualify for certain governmental assistance.
A testamentary trust is a trust that is created through a will. Unlike living trusts, testamentary trusts do not avoid probate. A testamentary trust must go through probate and will be created as part of the probate process. The most common uses of Testamentary Trusts are to pass money or property to minors. Given that minors cannot receive substantial gifts directly; the testamentary trust allows for an adult to manage the minor’s property. A testamentary trust is typically utilized in the event that both parents pass and all or most of the assets pass to the minor child. In this event, a testamentary trust is designated to be established. A Testamentary Trust is designed to protect young children if both parents should die. The trustee of a testamentary trust does not need to be the same person as the guardian of the child or children. You may want a financial institution to be a trustee or you may want a relative to raise the child or children and a different relative to look after the money. You should also name a successor trustee in the event that the first trustee can no longer serve as trustee. A testamentary trust also allows you to decide the age and conditions under which assets will be disbursed to your child or children. There is no requirement that a child receive all of the assets at once or that he/she receive them at a certain age. Your trust can and should be tailored to your specific situation and to the needs and maturity levels of your child or children.