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What are the different types of trusts?

On Behalf of | Dec 5, 2022 | Estate Planning

A trust is a lawful arrangement where one party has property or assets for the benefit of another party. The trustee may be an individual, a corporation, or a charitable organization. Many different types of trusts are available in Illinois, each with its own purpose and set of rules.

The most common types of trusts are revocable, which is a type of trust that can be revoked or modified by the grantor at any time. Then there is the irrevocable trust, where the terms cannot be changed after the creation of the trust. This trust is often used in estate planning to protect assets from being taxed or seized.

Tax exemption trusts

A charitable trust, upon its creation, has the purpose of providing financial support to a charitable organization. Charitable trusts can be created during a person’s lifetime or after their death. A charitable trust can be funded with cash, stocks, bonds, real estate, or other assets. Charitable trusts are exempt from federal income taxes. Distributions from a charitable trust are also tax-exempt if their use is for qualified charitable purposes.

GRATs transfer property to children or other beneficiaries while minimizing gift and estate taxes. With a GRAT, the grantor retains an annuity for several years. At the end, the trust property passes to the beneficiaries free of gift and estate taxes.

Strict distribution trusts

A spendthrift trust protects the assets of the trust from being used up by the beneficiaries. The terms of these trusts can specify how and when the assets can be used and can also include provisions for protecting the assets from creditors.

Trusts to protect disabled persons

Creating a special needs trust provides financial support for someone with a disability. The funds in the trust cover medical and living expenses but do not pay for things that would disqualify the person from government benefits like food stamps or Medicaid.

Finding the right trust

Selecting the right trust matches your needs to the types of trusts available. This is not an exhaustive detailing of all trusts, but those found here can help you get started searching for the right trust.