Types of Trusts; Spendthrift Trust, Totten Trust, Testamentary Trust, Irrevocable versus Revocable
Questions and Answers about Trusts
Question: What is a Spendthrift Trust?
Answer: A Spendthrift Trust or a Spendthrift Provision in a Trust Deed prohibits the beneficiary's interests from being assigned and hence protects the beneficiaries from creditors.
Most of the assets in the Trust will be safe from banks or creditors. However, creditors can still collect any money paid directly to the beneficiary from the Trust. If an individual thinks that his beneficiary could have problems with creditors, he can give the Trustee broad control over the Trust. The Trustee may be instructed by the Trust to withhold income and/or principal from the beneficiary.
For maximum effectiveness, a Spendthrift Trust should be irrevocable. It must also give the Trustee full discretion over the assets of the Trust, so the Trustee will have full power in deciding when and how much money should be given to the beneficiary.
Question: What is a Totten Trust?
Answer: A Totten Trust is a revocable trust created by one's deposit of money in one's own name as a Trustee for another. A Totten Trust is commonly used to indicate a success of to the account without having to create a will.
Setting up a Totten Trust is as simple someone going to a bank and opening a Trust account by himself. A Totten Trust is best for amounts of about $20,000 or less. Larger amounts could present problems in payment of estate taxes at the depositors' death, since the assets in these accounts are added to his taxable estate. A Totten Trust can be paid out quickly after death with a minimum of formalities. Because the money transfers directly, there is no need to choose a third-party Trustee. As with any other Trust, a Totten Trust keeps assets out of probate. A Totten Trust can be revoked at any time during the grantor's lifetime, and the beneficiary cannot withdraw the money from the Trust account until the grantor's death.
Question: What is a Testamentary Trust?
Answer: A Testamentary Trust is a Trust that is created by a will and takes effect when the settlor (testator) dies.
Unlike a Living Trust (made while a person lives), a Testamentary Trust is established through a Will upon a person's death to handle his minor children's financial affairs. This eases the necessity of having to set up a guardianship of the estate, with all of the concurrent court filings, accountings and supervision.
The Executor is given full discretion to decide if the Trust is beneficial to the children, and whether the trust should be established. If anyone currently has minor children, or is considering having children, inclusion of this provision gives an Executor the greatest flexibility in handling the children's estate if neither parent is alive while the children are still minors.
Normally, the person or one of the people named as guardian of the minor children will also be named the Trustee of the Trust. However, in some circumstances it may be advantageous to have different people fulfill these roles.
Question: What is the difference between a Revocable Trust and an Irrevocable Trust?
Answer: A Revocable Trust is where the Grantor can change the terms of the Trust or even revoke the Trust altogether and take back all of the assets in the Trust. An Irrevocable Trust is where the terms of the Trust cannot be changed (i.e., the beneficiary cannot be changed), and that whatever assets are placed in that Trust cannot be withdrawn by the Trustee.
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