The following is information on the different types of trusts in Washington, DC and how each trust is defined. For assistance with your trust, consult with a DC trusts lawyer today.
There are several different kinds of trusts. The two main types of trusts are testamentary trusts and free standing trusts. Testamentary trusts are trusts that are created through and individual’s last will and testament, and are funded after the grantor’s death. Free standing trusts are created during a person’s lifetime, and are typically funded while the grantor is still alive.
Although these are the two primary categories of trusts, there are several types of trusts within those main categories such as revocable living trusts, irrevocable trusts, special needs trusts, charitable remainder trusts, qualified terminable interest property trusts to name a few.
The most common trust that individuals are familiar with is a revocable living trust, which is created and funded during one’s lifetime. Often the grantor serves as the initial trustee and the trust is held for his or her benefit during his or her lifetime. After the grantor becomes incapacitated, the trust can no longer be amended or revoked. Upon the grantor’s death, the trust would be administered pursuant to the provisions for the contingent beneficiaries.
A testamentary trust is a trust that’s created within your last will and testament. A testamentary trust is not funded with any assets until after your death. However, it may be necessary to coordinate beneficiary designations during the grantor’s lifetime to ensure proper funding at the death of the grantor.
Free Standing Trusts
A free standing trust is a trust that is contained in a separate trust document. Free standing trusts may be revocable or irrevocable, meaning the grantor or settlor may retain the rights to modify, amend, or revoke the trust in its entirety or to completely give up all authority over the trust.
Revocable Living Trusts
The most well-known free standing trust is a revocable living trust. A revocable living trust is a trust that is created and funded during a grantor’s lifetime. The grantor retains the rights to amend, modify or revoke the trust in its entirety during his or her lifetime.
A revocable living trust becomes irrevocable at the death of the grantor or at such a time as the grantor loses the required capacity to amend or revoke the trust. The grantor may serve as the initial trustee. During the grantor’s lifetime, the provisions of a revocable living trust will allow the trust assets to be used primarily for the grantor. During the grantor’s lifetime, the trust assets will continue to use the grantor’s social security number. After the death of the grantor, the trust is assigned a new tax identification number and the provisions of the trust provide for the terms for the administration of the trust.
Another type of free standing trust familiar to most people is the irrevocable trust. Unlike the revocable trust, this trust cannot be revoked or changed by the grantor once the trust is created and funded. Essentially, with an irrevocable trust, the grantor gives up all rights of ownership to the property. The grantor does not have rights to the trust assets and the trust assets will not be used for the benefit of the grantor. Although there are numerous reasons to create an irrevocable trust, it is commonly used for estate tax or disability planning.
Asset Protection Trusts
Asset protection trusts or asset protection provisions are provisions added to different types of trusts with the purpose of limiting the exposure of the trust assets to creditors. Asset protection provisions, sometimes known as spendthrift provisions may also limit the exposure of the assets of the trust to the creditors of the named trust beneficiaries.
There is a myriad of different types of charitable trusts depending on the grantor’s charitable intent. Although a charitable trust can be used to memorialize and provide for the grantor’s altruistic intent, they can also be used in estate or income tax planning. Some common types of charitable trusts include CRUTS and CRATS.
Special Needs Trusts
Special needs trusts are designed for the benefit of a disabled person, a child, a friend, a parent. These trusts are often used to supplement rather than interfere with any public assistance that a person is receiving or may receive in the future.
A bypass trust is a common estate planning tool for married couples. The purpose of a bypass trust is to take advantage of the first spouse to die’s estate tax exemption. For example, DC has a one million dollar estate tax exemption for the 2015 tax year. With a married couple, when the first spouse dies, if a couple’s estate planning allows for a bypass trust, then such a trust can be funded for the benefit of the surviving spouse.
If the bypass trust is funded with one million dollars or less, then there is no estate tax at the death of the first spouse because of the DC estate tax exemption. At the death of the second spouse, assets remaining in the bypass trust are considered taxed for estate taxes purposes on the death of the first spouse and are not considered part of the second spouse’s gross taxable estate. The trust is irrevocable, but the surviving spouse may receive income and principle during his or her lifetime.
Finding The Right Trust For You
An estate planning attorney is most familiar with the trust laws of the District Columbia, and may advise you regarding the best trusts or trusts provisions to use in your personalized estate plan. It is easy when drafting estate planning documents to unintentionally make an error with regard to the drafting process or the funding process. It is important to speak with a DC attorney who can advise on how to properly draft the trust, the role of the trust as part of a comprehensive estate plan, advise you on the responsibilities of the trustee and help to coordinate the overall estate plan to incorporate the use of a trust.
Because of the misperceptions about trusts and their purpose, it is generally not an easy task for someone who is not an attorney to draft, execute and fund. An attorney who does not have experience in estate planning, may also not be familiar with the nuances of creating an individualized estate plan. It is best left to an experienced attorney who can coordinate your overall estate plan.