All About Trusts

Trusts can play an important role in your wealth management plans. Many methods and strategies used to reduce estate tax liability involve trusts. Trusts can be flexible devices designed to solve particular issues. They can provide for one’s future care, support a surviving spouse and children, accommodate family members with special needs and reduce income, gift and estate taxes.

What are trusts?

Living TrustsA trust is a legal relationship in which an owner (“grantor”) transfers legal title to certain property to another party (“trustee”) who in turn holds it for the benefit of the grantor and/or another individual or individuals (“beneficiary”). The terms and conditions under which the property is held by the trustee are set forth in a written document.

With revocable trusts, the grantor reserves the right to control the assets and change the terms of the trust at any time. If a trust is irrevocable, the grantor gives up rights to the trust property and cannot amend the terms of the trust.

Basic trusts that are properly established can be used to:

  •   Manage and protect assets during your lifetime
  •   Provide continuity in the management of your affairs after your death
  •   Control how and when your assets are distributed
  •   Avoid much of the costs and delays of probate
  •   Ensure privacy and confidentiality in the handling of your affairs
  •   Control income and principal distributions to children and grandchildren
  •   Reduce estate and gift taxes

More advanced trusts can be used to accomplish more sophisticated financial and estate planning objectives. These trusts usually are irrevocable and can be used by themselves or in conjunction with other trusts.

Types of Trusts

Revocable Trust (Living Trust)

A Revocable Trust is so named because you can revoke (i.e., change or cancel) it at any time. It is also called a Living Trust because it allows you to enjoy the benefits of a trust while you are still living. A Revocable Trust provides flexibility. It allows you to keep control over your assets while you are alive and maximizes the amount of your property that will benefit your family (or other beneficiaries) after your death. Assets properly transferred to your Living Trust during your life will avoid the costs, expenses and delays involved with the probate process upon your death. A Living Trust can result in more of your assets being available for your beneficiaries sooner, at a significantly lesser cost. You may change the terms of the trust or even cancel it, as long as the trust agreement allows you to do so.

Marital Trust

A Marital Trust typically would be created on your death under the terms of your Living Trust. The trust is designed to benefit the surviving spouse and minimize estate taxes. To achieve the tax benefits, the income from the trust must be paid to the surviving spouse after your death. The surviving spouse may have the right to withdraw part or all of the property, and the trustee may be given the discretion to distribute trust principal to the surviving spouse for certain purposes (e.g., health, education, maintenance and support). The surviving spouse would have the right to designate how and to whom the property in the Marital Trust would be distributed upon his or her death.

Bypass Trust

This type of trust would typically be established upon your death under the terms of your Living Trust. It is designed to take advantage of the amount that each of us can give away (during life or at death) without incurring gift or estate taxes. If properly structured, the trust would not be subject to estate taxes in your estate or in the estate of your surviving spouse. Thus, the trust property can pass to your children or other beneficiaries free of estate taxes. The trust usually is structured so the surviving spouse can receive income and principal from the trust. In 2012, the amount that can be given without incurring gift or estate taxes is $5.12 million.

Qualified Terminable Interest Property (QTIP)

A QTIP Trust typically would be created on your death under the terms of your Living Trust. This trust is designed to benefit a surviving spouse and minimize estate taxes and possibly Generation-Skipping Transfer Taxes. To achieve the tax benefits, the surviving spouse must receive the income from the trust. In addition, the trustee may be given discretion to distribute principal to the surviving spouse for certain purposes (e.g., health, education, maintenance and support). The major difference between the QTIP Trust and the Marital Trust is that the grantor — not the surviving spouse — would determine how and to whom the trust property is to be distributed on the surviving spouse’s death. For this reason, QTIP Trusts are often used in second marriage situations.

Generation Skipping Trust

A Generation-Skipping Trust has as its remainder beneficiaries persons who belong to a generation that is at least two generations after yours. For example, a trust that would benefit your child during the child’s life and provide that, upon the child’s death, the assets are to be distributed free of trust to your grandchild is a Generation-Skipping Trust. Because the child does not receive the trust assets free of the trust, the child’s generation has been skipped.

Irrevocable Trust

An Irrevocable Trust is an inflexible, fixed trust. You cannot change or cancel it once it has been signed. Despite this inflexibility, an Irrevocable Trust may be the right choice for many people because it can be used to make gifts to family members in order to help reduce taxes due on an estate at death.

Irrevocable Life Insurance Trust (ILIT)

An ILIT is an Irrevocable Trust that owns one or more life insurance policies. If this type of trust owns insurance policies on your life, the proceeds payable on your death generally should not be included in your estate for estate tax purposes. This type of trust is commonly used by business owners to provide liquid funds necessary to pay estate taxes.

Dynasty Trust

A Dynasty Trust is designed to remain in existence and benefit multiple generations of a family. In some states, the trust must terminate at some point. In other states, such as South Dakota, the trust may remain in existence forever. A Dynasty Trust is a great way to preserve assets for future generations.

Special Needs Trust

Special needs trusts provide for continuing conservation and enhancement of the assets transferred to the Trust to supplement, not supplant, other benefits for which the beneficiary might be eligible as a result of the beneficiary’s disability, whether through public or private, profit or non-profit corporations or agencies. Trusts can be Self-Settled which are generally funded from a personal injury lawsuit and have a payback provision for benefits paid by a public agency at the death of the disabled person, or may be Third Party which is simply an intervivos or testamentary trust created by a family member with their own funds with the intention of benefiting a disabled person without disqualifying the disabled person for public benefits.

Charitable Remainder Trust

A Charitable Remainder Trust is a special type of Irrevocable Trust that may allow you to receive income tax deductions now, get income from the trust for life or for a number of years, and give the balance to a charity on your death. This type of trust is used to benefit charities while providing income, gift and estate tax savings.

Charitable Trust or Private Foundation

This Irrevocable Trust benefits one or more charitable organizations. By establishing a Charitable Trust or Private Foundation, an individual may minimize income, gift and estate taxes.

Agent for Trustee

Agent for Trustee is an omnibus custody service, which provides administrative support and servicing for Trustees. This type of service is especially helpful for those who may be serving as trustee for a spouse or family member’s assets. The acting Trustee retains all fiduciary responsibility, but appoints an agent with regard to certain non-discretionary duties listed below. This arrangement provides valuable and efficient trust management to assist in the Trustee’s fiduciary responsibilities. Services would typically include asset custody, principal and income cash accounting, trust-style statements, and trust officer consultation and support.


Apex partners with National Advisors Trust Company to offer the highest caliber of trust services in all 50 States. Reach out today if you have any questions about Trusts.

Some information in this article is provided by National Advisors Trust Company.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax and/or legal advice regarding your individual situation from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.