In my first blog post, I touched upon the definition and origins of trusts.  Remember how excited you were to learn about them and how you were going to impress everyone at your next cocktail party with your new-found knowledge?  Of course you do!  In my second post, I am going to dig into the different categories of trusts and their general uses.  Based on my experience and research over the years, I am aware of 30 or so different types of trusts (don’t worry I’m not going to list them all, let alone discuss them), most of them fit into one or more of the following four categories:

Living or Testamentary

A living trust, also called an inter-vivos trust (we’re now starting to learn Latin – aren’t we fancy), is a written document in which an individual’s assets are placed in a trust for the benefit of that individual during his or her lifetime.  Upon the death of the individual, the assets are transferred to his or her beneficiaries [1].  A living trust can be either revocable or irrevocable, which is discussed below.

A testamentary trust, also referred to as a will trust, is created under the will of the individual and is funded upon the death of the individual.  I always thought it should be called the “bummer trust” because you have to die for it to come into effect.

Revocable or Irrevocable

A revocable trust is always a living trust, as you have read above, that is created during the lifetime of the trustor.  It may be modified or terminated at any point by the trustee, who is usually the trustor as well (since it’s a living trust).  This category of trust is normally used for estate planning purposes, generally for the purpose of avoiding probate and the associated fees.

An irrevocable trust can be living or testamentary, but once in effect the terms of the trust cannot be altered in any way – except for very rare situations – so the trustor must give careful consideration when agreeing to the trust terms.

The main reasons to select an irrevocable trust structure are because of taxes and to protect assets from creditors. Irrevocable trusts remove the assets from the trustor’s taxable estate, meaning they are not subject to estate tax upon death, and they also relieve the trustor of tax responsibility for any income generated by the assets. Irrevocable trusts can be difficult to set up and require the help of a qualified attorney [2].

Look for my next blog post where I will discuss Revocable Living Trusts in more detail to see if one might be right for you.

If you have any questions regarding trusts, give me a call, John McCarthy at 570.826.1801 ext. 309, or call your current wealth advisor at Jacobi Capital.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.