- posted: Jul. 30, 2022
- Estate Planning
A trust is created when a person who owns property (the principal) signs a document that designates a person or entity (a trustee) to manage property (the assets of the trust) for another person (the beneficiary) according to a set of rules.
One of the most common types of trust is a trust for a minor, in which a trustee is named to ensure that assets that belong to a person under 18 years of age are properly managed until the beneficiary reaches legal age. However, estate planning attorneys use many other types of trusts, each designed for a specific purpose. These are some of the other most common types:
- Living trust — The principal puts assets in a trust and appoints himself or herself the trustee. A living trust is usually revocable and may be modified during the principal’s lifetime. Typically, this type of trust is used for the purpose of avoiding probate of the principal’s estate, thereby saving the beneficiaries time and money.
- Bypass trust — This trust is used for many of the same purposes as a living trust but it does not come into existence until the principal dies. The terms of a bypass trust are contained in the principal’s will.
- Life insurance trust — These trusts are used for federal estate tax planning purposes. They must follow rules laid out by the IRS and should only be created by an experienced estate planning attorney.
- Spousal trust — Assets are held in the trust for the benefit of the principal’s spouse, with the assets passing to designated beneficiaries upon that spouse’s death.
- Spendthrift trust — This type of trust puts someone in charge of managing the assets of a beneficiary who might otherwise spend them wastefully. The trustee approves the beneficiary’s requests for money only if appropriate and reasonable.
- Special needs trust — These trusts are designed specifically for beneficiaries who qualify for government benefits such as Social Security Income (SSI) or Medicaid. Assets placed in a special needs trust can be used to help take care of the beneficiary while they continue to qualify for government benefits.
- Charitable trust — There are many variations of a charitable trust but the most basic attribute is that some interest passes to an entity that qualifies for tax free status with the IRS. These trusts are used to satisfy a principal’s interest in fulfilling a charitable purpose while minimizing income and estate taxes.
One thing that all types of trusts have in common is that they will not achieve the principal’s goals unless they are created carefully. An experienced Arizona estates and trusts attorney is a good source to ask what kind of trust makes sense in your situation and how the trust documents should be drafted.
At the Law Firm of Joseph M. Udall, PLC in Mesa, Arizona, we help each client create an estate plan that makes sense for his or her family. Contact us online or call us at (480) 500-1866 for an initial phone consultation.