An Overview of Different Types of Trusts in Washington D.C.

Irrevocable Trust

The distinctive characteristic of irrevocable trusts is that the creator cannot amend the trust’s provisions. The creator cannot transfer irrevocable trust funds to benefit anyone other than the stated beneficiary. Sometimes, the irrevocable trust document may permit certain amendments if circumstances in the beneficiary’s life justify or require it. An exception also exists if the trust document’s terms expressly allow it.

Assets in an irrevocable trust at the time of death of the grantor also avoid the probate process, creating a smooth method to transfer assets to the beneficiary. The grantor essentially controls how and when beneficiaries receive their inheritance.

Testamentary Trusts

A testamentary trust is created post-death and based on the last will. The last will is usually detailed enough to create a testamentary trust. A significant advantage of this type of trust is that it can be edited or modified numerous times during the grantor’s lifetime. However, the trust cannot take effect until the grantor’s death.

Charitable Remainder Annuity Trust (CRAT)

Charitable trusts, sometimes called charitable remainder trusts, are set up to hold and manage resources to benefit a charitable cause or public purpose. They are typically created to advance philanthropic objectives. These may be social, educational, scientific, or even religious objectives.

A charitable remainder trust is funded with assets donated by the person setting up the trust. These assets could include cash, real estate, securities, etc. The trust’s assets qualify for an estate tax exemption, much the same as donations to charity are exempt from income tax.

Spendthrift Trust

Spendthrift trusts protect the assets within them from being squandered or seized by creditors. This type of trust restricts the beneficiary’s ability to access the trust’s principal and income, providing asset protection.

A spendthrift trust is advantageous if the beneficiary has financial troubles, a lawsuit, or any other circumstances that could lead to creditors attempting to collect debts.

Special Needs Trusts

A special needs trust provides for the comfort of a family member with special needs without jeopardizing their eligibility to avail government benefits. When a person receives an inheritance or financial gifts, it could affect their eligibility for government assistance and help.

While a person with special needs can benefit from a special needs trust as long they are not the trustee, this type involves intricate legal regulations at both federal and state levels. Creating a special needs trust requires careful consideration and legal experience, so involving a special needs planning attorney may be a good idea.

Qualified Personal Residence Trusts (QPRT)

A qualified personal residence trust allows the grantor to transfer a residence into an irrevocable trust while retaining control and possession of the property for a specified period. Once that time is up, the property transfers to the trust’s beneficiaries without being subject to estate taxes.

This type of trust can benefit estate planning, especially if the property’s value is expected to be appreciated. It also allows the grantor to remain in their home and enjoy its benefits during the specified period.

Irrevocable Life Insurance Trusts (ILIT)

An irrevocable life insurance trust is an excellent estate planning tool for high-net-worth individuals. It helps in reducing the taxable value of the individual’s estate by removing life insurance proceeds from the gross estate. The trust allows the beneficiaries to receive funds without any income tax.

An ILIT provides a tax-efficient way to provide financial security and support to loved ones after your death. Life insurance proceeds are generally not subject to income tax but may be included in the taxable estate if the policy owner is also the insured. An ILIT helps mitigate this risk by separating the policy from the estate.