Did you know that there are at least 13 Different Types of Trusts?

Did you know that there are at least 13 Different Types of Trusts? Why on earth would you want to pick from a list of 13 different trusts? My hope is that this will give you some ideas of some options that you may not have known existed and will be helpful to you when putting your estate plan together.

There are two main categories are Revocable and Irrevocable, but now, within these two categories, there are so many choices and most people don't know about all of them. There are special situations where you're going to want one of these specialized trusts. I like word pictures and I like things that help clarify for me.

So, let's talk Coffee Shop!

You may wonder, "What the heck does a Coffee Shop have to do with legal documents?" There are a whole lot of different trusts that you can get: here are thirteen that I will discuss!

1. The first one is Testamentary Trust and is the most commonly used. 

Using the Coffee Shop analogy, let's pretend your babysitter is taking your child to the coffee shop. She says, "Your mom and dad said you can have steamed milk. So we are getting steamed milk today. We'll put sprinkles on it so it will be special! and it's OK because this is what your parents said you can have." The Testamentary Trust is just like that. It's a type of document that gives you the ability to choose when the heirs will get the money. You put the controls on who gets what and when they get it. Like when they turn twenty-seven ears old, or finish college first. I wouldn't have wanted my eighteen year olds to have gotten large amounts of money, because you know how eighteen year olds think. So, this trust allows you to give them the money later.

2. The next trust is the Special Needs Trust.

The Coffee Shop equivalent is to order a fat free, sugar free, oat milk latte. That's a lot of special needs! Well, a Special Needs trust is similar in that you have a dependent on you who is receiving multiple services to assist with those special needs. The dependent can be a minor child, an adult child or other person. They get benefits from the government, they get education, respite care and different services that come from the government. You want to keep this going in the event of your passing. You don't want these to stop. This person is depending on you and is accustomed to having these benefits and you don't want that to stop. You don't want to disrupt their life. You want to keep life running as smoothly as possible. This trust guarantees that these services will continue. Be sure to seek legal counsel to correctly instate this trust. If you are doing this by yourself, you create a Special Needs Trust by purchasing it separately and adding it on to the trust documents you have chosen.

3. A funny name for a trust is a QTIP Trust. This one's a whopper to say: Qualified Terminal Interest Property Trust.

Let's say your family went into the Coffee Shop and got a really great big whoppin' breakfast sandwich. You tell your family, "Let's all share this sandwich now, and then, later we will share a great big pastry." A QTIP Trust does the same thing: it is a sharing vehicle. It divides the assets among the beneficiaries at different times. The spouse can get half of the money upon your death, but when the spouse dies, the children get the other half. It restricts the spouse from spending everything, because some is being saved for the kids. It allows the spouse to have access to some of the money, but it preserves more for later.

Some now, and some later.

4. The Blind Trust plays out often in a coffee shop.

Mom is so fed up with the kids that she just doesn't really care what they want. "You are getting a healthy green drink and that's it. It's Mom's choice and that is that!" Mom decides and there is no questioning it. A Blind Trust is the same way. You are managing the assets in the fund and you don't want the beneficiaries to have input into what's happening! Let's say you have kids who hate each other and there is dysfunction in your family and you know these kids will not agree on absolutely anything. Well, you don't have to tell them anything! You figure it out and place the assets in a Blind Trust and there is no way they can know what is going on. They have absolutely no input and cannot advise on how to handle the assets. You do this because of the conflict that you figure is going to arise. Some families really have a lot of conflict. So if you think they will fight and argue about it, set up a Blind Trust. It keeps them in the dark, and is useful to stop conflicts.....at least while you are still around.

5. The Spend Thrift Trust is similar to taking your tiny children into a Coffee Shop and you're obviously not going to give them coffee: that's the last thing you want them to have!

You can get them an almond latte or something calming. You tell them, "We are getting this yummy drink in a very small size and this time, no whip or sugar. And I'm holding it so it won't spill." A Spend Thrift Trust is like this because you're figuring that your heirs will squander everything you give them. This trust specifies how they can use the assets and when they can use them. Let's say you have investments earning money; they can have the income, but not the investments, because you don't want them squandering everything. But as the investments generate income, they are welcome to that. It gives them a little without giving them everything in case you are fearful that they will be irresponsible.

6. The Charitable Trust Coffee Shop Equivalent is like deciding to pay for the guy behind you in line.

It takes care of other organizations that you find to be valuable. It is established during your lifetime and distributes assets to this chosen charity or non-profit organization upon your death. Walt Disney gave half of his money to his family and half to charity: this seems to be a good solution for a philanthropic heart. It allows the gift taxes or estate taxes to be reduced or entirely eliminated. So, the charity gets that much more money. Maybe you don't have kids, or maybe they are financially well off and fine and don't need your money and you feel better designating it for a charity. That's where the Charitable Trust will serve you.

7. A Totten Trust is like giving the Coffee Shop manager fifty bucks and asking him to pay for all the first responders that come in. I love first responders and always honor them and I do this a lot. I leave money to pay for the coffees until the money runs out. A Totten Trust is similar to that as it puts money in an account or another security. You name a beneficiary who will inherit the funds upon your death, but they do not have access to it while you're alive. You can change this as you wish. But they don't get access to anything while you are alive. Another name for this is a Payable On Death (POD) account. Those two names go back and forth.

8. An Asset Protection Trust is like an experience I had in San Diego. The seagulls kept swooping down and grabbing our food, so we went into the screened porch to finish our dining experience. It's kind of funny that these pesky birds just take everything they want. Likewise, you want to protect your assets and this is the best type of trust to use if you face legal action against you. If you want to protect your assets against creditors, lawsuits, legal disputes or judgments against your estate, it allows the trustee to hold the assets. They will be protected against taxes, divorce, bankruptcy, creditors and other judgments.

9. The Constructive Trust kind of makes me laugh, because in real life, what you see in the legal world has its equivalent in a Coffee Shop. This is like if an older brother has been selfish, and took his little sister's toys. So, when you get to the Coffee Shop you say, "You were really greedy this morning, so your sister can have YOUR cake pop right now. She can enjoy it because you overstepped and took what was hers." There is a legal term for this behavior and it is called "Unjust Enrichment." The courts apply this Trust after you pass away because it has been determined that somebody possessed the assets unfairly. The courts create the Constructive Trust (it's kind of implied, because you didn't create it when you were alive) so that they can transfer the assets to the rightful owners who they were intended for. We had a situation like this where people we knew enriched themselves to the money that should have gone to the correct family members. So that's why you might need a Constructive Trust.

10. The Bypass Trust has another name, the Tax Bypass Trust. This is like Tax Free Tuesday for Seniors. It is set up for people who don't want their estate to be subject to multiple times of taxation by the federal government. Usually, married couples will create this trust and they pass their assets to the surviving spouse. The children receive benefits after the remaining spouse passes away and the the assets are split up into Type A and Type B. Type A is revocable. It is a marital trust and the surviving spouse has full ownership of it. Type B is the irrevocable family trust and the surviving spouse does not own the assets, but can get their income from the assets. The spouses will inherit the assets tax free for their lifetimes, but when the last spouse dies, the children will inherit. However they will be taxed at a terrible tax rate and can be up to fifty-five percent! Be super sure if you want to use this trust as your kids will take a financial hit. This can be a bit confusing, so be sure to seek legal counsel on this one.

11. The Generation Skipping Trust. This is like Gramma taking you out for an icy frappe and ditching your parents! We are leaving those folks at home; they're not getting any---it's just you and Gramma! Similarly, some parents feel that their children will not handle their money as well as their grandchildren might. Maybe they prefer their grandchildren to their children. So that is why there is a Generation Skipping Trust. Transferring assets to your grandchildren will avoid the estate taxes. And then, if you want, you do have an option here of giving the children access to the income that the assets generate. They can get some of the income, but you want your grandchildren to get all of the assets.

12. The Credit Shelter Trust is like watching a street performer doing the Shell Game. Years ago, I was in San Francisco waiting in line at Pier 39 and all these street performers were entertaining the crowd. One of them was a Shell Game guy who would put something under one cup and switch around and around and we got to guess the cup. A Credit Shelter Trust reminds me of that, because what you are doing is transferring assets here and transferring there. You're going back and forth. (This is one I would never attempt setting up on my own. I would ask for legal help on this one!) It allows affluent couples to minimize or eliminate tax bills on the estate because it transfers the estate and assets from one spouse to the other spouse. It preserves the state tax ememption of a deceased spouse for later use for future use. The assets don't increase the value of the second spouse's estate because the estate is owned and managed by the trustee. The surviving spouse is allowed to access the income from that trust and is allowed to access the assets under the trust in certain special circumstances, like medical emergencies or funding higher education. Then, when the second spouse dies, the funds are not subject to taxes when they transfer to the beneficiaries. If this sounds like something you would like, be sure to get legal assistance.

13. The last trust here is the Life Insurance Trust. In the Coffee Shop analogy it is similar to BOGO: buy one get one free! It is designed to hold the proceeds of your life insurance policy. It allows the life insurance payouts to be invested or distributed without tax to the beneficiaries.

So there you go! There are so many different trusts to choose from (just like the endless latte combinations), and they all serve a unique purpose.

Are you leaning towards any type in particular?