Understanding the Most Common Types of Trusts

Whether you’re aiming to protect your wealth, provide for future generations, or support a specific cause or individual, there’s likely a trust tailored to your needs. Despite their importance, many people seem overwhelmed by the variety of trusts available, unsure where to begin or which option is best suited to their situation.  

At Middle Tennessee Family Law in Franklin, Tennessee, we are dedicated to helping individuals and families throughout Williamson County, Davidson County, Wilson County, Sumner County, and Rutherford County with thoughtful estate planning strategies. Led by Attorney Tiffany Johns, we offer complimentary case evaluations to discuss your needs and explore your options. 

We understand the importance of protecting what matters most to you. This blog offers a comprehensive guide to the most common types of trusts, demystifying a critical aspect of estate planning and equipping you with the knowledge to make informed decisions for your future.

What Is a Trust? 

A trust is a legal arrangement in which a person (the grantor) transfers assets to a trustee, who manages those assets on behalf of one or more beneficiaries. Trusts can be designed to accomplish a wide variety of objectives, including avoiding probate, minimizing estate taxes, and protecting assets from creditors. Trusts can take effect during your lifetime (living trusts) or after your death (testamentary trusts), and their terms are highly customizable based on your goals. 

Revocable Trusts 

One of the most popular types of trusts is the revocable trust (or living trust). These trusts are highly flexible and can be altered or revoked by the grantor during their lifetime. These trusts are often used to avoid the time-consuming and costly probate process, as assets in the trust pass directly to beneficiaries upon the grantor's death.  

Additionally, revocable trusts allow the grantor to maintain control over their assets while simplifying estate administration. However, because the grantor retains control, these assets are typically included in their estate for tax purposes. 

Irrevocable Trusts 

Unlike revocable trusts, irrevocable trusts cannot be changed or revoked without the consent of all the parties involved. While this lack of flexibility could be considered a downside, irrevocable trusts offer significant benefits, particularly in terms of asset protection and tax savings.  

By transferring assets into an irrevocable trust, the grantor effectively removes those assets from their estate. By doing so, you can help reduce your taxable estate and shield your assets from creditors or legal court judgments. 

Special Needs Trusts 

If you have loved ones with disabilities, a special needs trust can help secure their financial future without jeopardizing eligibility for government benefits like Supplemental Security Income (SSI) or Medicaid. These trusts are designed to provide for the beneficiary’s supplemental needs, such as transportation, education, or recreational expenses, without disqualifying them from critical programs.  

Special needs trusts require careful drafting to comply with legal requirements, which is why it's essential to work with a knowledgeable estate planning attorney to establish these accounts. 

Charitable Trusts 

For individuals or families passionate about philanthropy, charitable trusts provide a means to give back to causes they care deeply about, while potentially realizing tax benefits. There are two main types of charitable trusts: charitable remainder trusts (CRTs) and charitable lead trusts (CLTs).  

Charitable remainder trusts allow the grantor or other beneficiaries to receive income from the trust for a specified period, after which the remaining assets are donated to a charity. Charitable lead trusts, on the other hand, distribute income to a charitable organization during the trust's life, with the remaining assets passing to non-charitable beneficiaries. 

Testamentary Trusts 

Unlike living trusts, testamentary trusts take effect only after the grantor’s death and are outlined in the grantor's will. These trusts are commonly used to control the distribution of assets to beneficiaries over time, such as making sure that minor children receive funds responsibly or providing ongoing support to a surviving spouse.  

Testamentary trusts are subject to probate following the grantor's death, but can be an effective way to establish terms for asset management after your passing. 

Asset Protection Trusts 

Asset protection trusts are designed to protect your wealth from creditors, lawsuits, or other legal claims. These trusts are particularly appealing for individuals in high-liability professions, such as doctors or business owners.  By placing assets into this type of trust, the grantor can better protect their family’s financial future while maintaining the ability to dictate how those assets are distributed. 

Trusts for Minor Children 

Trusts can also play a crucial role in securing the well-being of minor children in the event of a parent’s untimely passing. These trusts ensure that funds are managed responsibly by a trustee until the child reaches a specified age or milestone, such as graduating from college. By creating a trust for your children, you can provide for their education, healthcare, and other needs without relinquishing control of significant assets until they are ready to manage them. 

Contact an Estate Planning Attorney for Experienced Legal Guidance 

When choosing the right trust, it's essential to carefully consider your goals, assets, and family dynamics. Since there are multiple options available, it's important to consult an experienced attorney for legal guidance and advice. At Middle Tennessee Family Law, we are experienced in helping our clients establish trusts tailored to their specific goals and needs.

Based in Franklin, Tennessee, we serve clients throughout Williamson County, Davidson County, Wilson County, Sumner County, and Rutherford County. Contact us today to schedule a free consultation and explore how a trust can enhance your estate plan.