The Different Types of Private Trusts

There are many different types of trusts to choose from when estate planning. When someone mentions a trust, they are usually referring to an express trust. This is a tri-party relationship in which a grantor gives an estate to a beneficiary and the estate is managed in the meantime by a trustee. This is a fiduciary relationship and is a great way to will your fortune to heirs while you are still alive. Once your fortune is in the trustee’s hands, he or she will work to make sure that your wishes are honored. A trust is treated like an entity for IRS purposes, and exists to protect and conserve property.

Almost all of these express trusts are considered private. Yet within the sphere of private trusts there are a variety of different options. For one, there are Health and Education Exclusions Trusts (HEETs.) These trusts allow a person to give money to grandchildren for their schooling. In these arrangements, a beneficiary only receives money from the account for school. By creating a HEET, a grantor may be able to avoid the Generation Skipping Transfer tax which can take out a lot of the inheritance money. A skip person who acts as a beneficiary has to be two or three generations younger than the grantor.

There are also Delaware Incomplete-gift Non-Grantor (DING) Trusts. These are trusts that are considered non-grantor and are self-settled. They are also irrevocable and give the grantor creditor protection. Delaware was the first state to allow these trusts, but they are now permitted in Alaska, New Hampshire, Rhode Island, Nevada, Utah, Wyoming, South Dakota and Tennessee. The assets that are placed in a DING trust are normally set up in a basis on the grantor’s death and included in the grantor’s estate for estate tax purposes. Normally DING trusts are protected by a committee of two beneficiaries.

A rabbi trust is used by business executives who want to minimize their current income taxes. These trusts are normally provides the grantor more security, which is why it is established. The trust must be carefully structured to avoid high taxes, and the trustee needs to be an independent third party. The assets in the trust need to be held separate from the employers other funds. Estate Planning says that it is important to only use a rabbi trust with a financially sound company.

Another type of trust is an oral trust. This is one were the UTC is utilized and the trust is never actually written down on paper. There are specific circumstances were an oral trust is permissible. The biggest problem with one of these trusts is the fact that they can be misinterpreted and it is hard to enforce then. People who are beneficiaries of an oral trust often end up in arguments about what the decedent meant by certain phrases.

Another type of private trust is an alimony and maintenance trust. These accounts are called Section 682 trusts as well, and are an execution to the general grantor trust rules. In these trusts, income that is paid to an ex-spouse will be taxed to the payee, rather than the grantor. These trusts only need to pay out to the ex-spouse until the spousal support or alimony period has ended. Once this is concluded, the trust can be transferred to children or changed. Details with trusts can often get confusing. A minor mistake may end up costing you thousands in taxes if you aren’t careful. If you are considering setting up a private trust, then you need to talk to a probate attorney today for aid. You will want someone there to help you draft this important document so that you do not end up in a difficult situation or have to pay out taxes that you could have avoided.