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What Are The Different Types Of Trusts?

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There are two basic forms of trust funds: after death or testamentary and living or inter vivos.

An after death trust fund will come into existence, usually by virtue of a will, after a person's death. The assets to fund these trusts must usually go through the probate process. In certain states they may be court-supervised even after the estate is closed. An example of an after death trust fund would be a mother leaving land to a trust benefiting a young son in her will. The will establishes the trust to which the land is transferred, to be administered by a trustee until the boy reaches a stated age, at which point the land is transferred to the son outright.

A living trust fund is a trust made while the person establishing the trust is still alive. In this case, a mother could establish a trust for her son during her lifetime, designating herself as trustee and her son as beneficiary. As the beneficiary, her son does not own the property but can receive income derived from it.

Living trust funds can be revocable or irrevocable. The most popular type of trust is the revocable living fund, which allows the individual to make changes to the trust during his or her lifetime. Revocable living trust funds avoid the often lengthy probate process but, by themselves, don't provide shelter for assets from federal or state estate taxes.

When an irrevocable living trust is set up, ownership of the assets is turned over to the trustee. The trust becomes, for tax purposes, a separate entity, and the assets cannot be removed, nor can changes be made by the grantor. This type of trust often is used by individuals with large estates to reduce estate taxes and avoid probate. However, if the grantor names himself or herself as trustee or is entitled to trust income, the tax benefits would generally be lost.

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