What Are the Different Types of Trusts?

Trusts are used increasingly in estate planning to accomplish a wide array of purposes. However, you generally need a specific type of trust to achieve targeted goals.

With that in mind, it is helpful to explore the different types of trusts available and how they operate to help individuals and families in a variety of ways.

Revocable and Irrevocable Trusts

Trusts are often broken down into distinct categories based on whether they are revocable or irrevocable. As the name implies, a revocable trust can be revoked. The person who created the trust can cancel it, remove property from it, or change the terms of the trust at any time so long as they remain legally competent. 

This makes revocable trusts very flexible. They offer a risk-free opportunity. If you are not happy with the way you have set up a revocable trust, you are free to change it or put an end to it. However, the flexibility of a revocable trust means that it is not typically the best way to shield assets from creditors or lawsuits.

An irrevocable trust, by contrast, is not flexible. Once you establish the terms, it can be difficult or impossible to change them. When you transfer property into the trust, usually you can’t remove it. Instead, the property will be used by the trustee to fulfill the purposes of the trust. As a result, irrevocable trusts can offer robust asset protection.

Testamentary Trusts

Another common type of trust is a testamentary trust. A testamentary trust doesn’t take effect until after you pass away. Estate planners often create testamentary trusts within the text of a will. For instance, parents with minor children might include provisions in their will that would create a testamentary trust to hold assets for the children until they reach the age of majority. In the meantime, the probate court will oversee a trustee who manages and disburses funds according to the provisions of the testamentary trust.

Probate Avoidance Trusts

Some of the most popular trusts among our Virginia clients are revocable living trusts designed to avoid probate. Because these are living trusts, they take effect right away, and since they are revocable, you can change the terms at any time unless you are incapacitated. Because of their revocable nature, property in a living trust is still generally considered to belong to you. As the creator of the trust, you would typically serve as the primary trustee and enjoy the benefits as the primary beneficiary. That enables you to use trust property without restriction.

However, if you become incapacitated, a successor trustee can step up to manage the property without the need for guardianship. When you pass away, property in the trust does not become part of your probate estate, but instead passes to your beneficiaries without the need for probate court supervision. A revocable living trust can save your loved ones considerable time, money, and effort after your death.

Asset Protection Trusts

Many different types of irrevocable trusts are used to shield assets in some way. They might protect assets from predation by creditors, reduce or prevent tax liability, or prevent assets from disqualifying a beneficiary otherwise eligible for government benefits. Let’s look at some examples:

  • A special needs trust allows an individual to preserve eligibility for benefits such as SSI while still receiving disbursements to provide for other needs.
  • A charitable remainder trust shields assets from taxation and enables the creator to establish a legacy while also enjoying trust income.
  • A spendthrift trust protects the assets of an individual who is not yet ready to manage their own money responsibly.
  • An education trust provides funding for a loved one’s education.
  • A Medicaid qualifying trust can help you qualify to receive long-term care benefits without spending all your assets on care needs.
  • A pet trust provides for the care of a beloved animal companion if you become incapacitated or pass away.

Estate planning attorneys custom-design trusts to accomplish your goals as part of a comprehensive estate plan.

Find Out How a Trust Could Benefit Your Family

At Jennifer Porter Law, PLLC, we craft trusts to meet a wide range of needs for clients in Northern Virginia, Hampton Roads, and the Peninsula. To discuss your objectives and learn how a trust could help you preserve your resources, contact our team online or call 571-532-9070 to schedule a consultation.