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Types of Trust

There are two basic forms of trusts: after-death (or testamentary) and living (or inter vivos).

An after-death trust 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. An example of an after-death trust 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, on the other hand, 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 trusts can be revocable or irrevocable. The most popular type of trust is the revocable living trust, which allows the individual to make changes to the trust during his or her life. Revocable living trusts avoid the often lengthy probate process but, by themselves, do not provide shelter for assets from 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 to reduce taxes and avoid probate. However, if the grantor names himself or herself as trustee or is entitled to trust income, the tax benefits will be lost.

Specific-Use Trusts

Before you set up a trust, ask yourself what you are trying to accomplish. Here are just a few of the many special uses for trusts:

A charitable trust is used to make donations and realize tax savings for an estate. Typically, there is a transfer of property such as art or real estate to a trust which continues to hold the asset until it is transferred to the charity, usually after death. The donor can continue to enjoy the use of the property, then the charitable gift may be deductible for estate tax purposes.
A spendthrift trust can be a good idea if your beneficiary is too young or does not have the mental capacity to handle money. The trust can be established so that the beneficiary receives small amounts of money at specified intervals. It is designed to prevent that person from squandering money or losing the principal in a bad investment.
Trusts are often used in conjunction with Offshore Companies to maximise tax benefits available from transferring assets offshore.

For further information on different aspects of establishing a trust, visit one of the following links: