The terminology used to describe the types of estate planning Trusts is often confusing. There are five basic types of estate planning trusts. Of course, attorneys make variations to each type. The following is a very general description of the five most commonly used trusts.
1. Inter Vivos or Testamentary
One may implement the trust during life (inter vivos), or it can become effective at the time of the maker’s death (testamentary). The inter vivos trust is a “trust” which comes into effect during the maker’s lifetime. A testamentary trust is created in a will and only comes into effect at the death of the maker.
2. Living, Loving, or Revocable Trust
These terms are used interchangeably to define a trust created and effective during the maker’s life, which can be amended or revoked at the pleasure of the maker during his or her lifetime. At the maker’s death it becomes irrevocable. This type of trust is often thought of as a will substitute. The property which is titled in such a trust during the maker’s lifetime is within the maker’s estate at death for tax purposes but avoids formal probate proceedings.
3. A and B Trusts or QTIP trust
This generally refers to an inter vivos or testamentary trust that establishes within the trust two (2) separate trusts. The A trust, or “marital trust” is a trust created for the surviving spouse. All gifts to the marital trust by the spouse who is the maker of the trust, pass tax free. There is no gift or estate tax on transfers between spouses. If it is defined as a QTIP trust, the maker of the A trust can put certain limitations on the use of the trust assets during the life of the surviving spouse and the conveyance of the remaining assets at the death of the survivor. The B trust, “family trust”, “bypass trust” ,“credit shelter trust”, or “exemption trust” is formed to use the first spouse to die’s estate tax exemption. The B Trust is used to deplete the decedent’s remaining applicable exclusion amount ( 2009-$3,500,000, 2010- no estate tax, 2011-$1,000,000).
4. Irrevocable Trust
A irrevocable trust is one that, once made, cannot be revoked by the maker. A transfer to an irrevocable trust can be a gift subject to gift tax limitations or an incomplete gift. An incomplete gift remains in the estate of the maker. To constitute a completed gift it must be a gift of a present interest, not a future interest. The donor must release the present dominion and control of the asset.
5. Charitable Trust
The basic purpose of a charitable trust is to, at the end of the day, gift assets for qualified charitable purposes. A charitable trust is deductible for tax purposes, to the extent that the IRS deems it to be charitable.
