What are the Different Types of Trusts?

Whether your objective is to ensure your children are provided for after your passing, safeguard your assets, or reduce the tax burden your beneficiaries may incur, a trust is an estate planning vehicle that can be used to help you achieve your goals. Importantly, a trust can allow you to manage your assets, plan for the future, and safeguard your legacy in the event of death or incapacity. There are many different types of trusts that can be used in Minnesota — and it’s essential to be familiar with the different types of trust vehicles that can be used to ensure your objectives are met.

What is a Trust?

A trust is a legal arrangement in which a third party called a “trustee” manages assets on behalf of a “beneficiary,” to whom the assets are distributed. The person who creates the trust and names the beneficiaries is referred to as the grantor, settlor, or trustor. These powerful instruments play a critical role in estate planning. Depending upon how they are set up, they can be an effective tool for incapacity planning as well.

Different Types of Trusts

The different types of trusts that can be used in Minnesota fall into two broad categories — they can be either revocable or irrevocable. A revocable trust is one that can be changed at any time, allowing the creator to maintain control over the assets in it during their lifetime. These types of trusts are very versatile and can be used to avoid the lengthy and public probate process. However, there are no immediate tax benefits with a revocable trust.

In contrast, an irrevocable trust cannot be amended or modified after it has been set up. With this type of trust, the creator gives up ownership and control of the assets in the trust while they are alive. In other words, the assets belong to the trust, rather than the person who created it. While they may seem like a less favorable option than revocable trusts, it’s vital to understand that irrevocable trusts come with many tax benefits and can protect assets from creditors.

What are Some Common Trusts Used in Minnesota?

Trusts offer a considerable amount of flexibility when it comes to managing and distributing assets. These instruments are not one-size-fits all and can be tailored to the creator’s needs. There are a wide variety of trusts that can be set up for specific uses and to meet certain objectives. For example, depending on the way a trust is set up, it can allow the creator to have control over how assets are distributed and ensure their financial affairs remain private. Trusts can also help to protect beneficiaries from incurring a substantial estate tax burden — and they can transfer assets to a beneficiary more quickly than by going through the probate process.

Some of the different types of trusts that are used in Minnesota include the following:

• Testamentary trusts — A testamentary trust is one that is created by a last will and testament and becomes effective after the creator’s passing. The assets in these types of trusts typically have to go through the probate process.
• Living trusts — Also referred to as an “inter vivos” trust, a living trust is one that is created during the lifetime of the creator. It allows the creator to control how their assets are managed both during their lifetime and when they die.
• Bypass trusts — A bypass trust is a revocable trust that can help married couples maximize their estate tax exemptions when one spouse passes away.
• Life insurance trusts — A life insurance trust places the life insurance policy into a trust, removing it from the creator’s estate. It can help protect life insurance proceeds from estate taxes and allows the creator to distribute the proceeds to their chosen beneficiaries.
• Charitable trusts — A charitable trust is a legal arrangement that allows the creator to donate their assets to a charity of their choice while minimizing gift taxes and deferring capital gains taxes.
• Special needs trusts and Supplemental needs trusts — Either of these trusts can be set up to provide for a beneficiary who has a disability, while allowing them to maintain access to their government benefits. A special needs trust is funded with the beneficiary’s own assets, while a supplemental needs trust is funded with the assets of a third party such as parents or grandparents.
• Spendthrift trusts — A spendthrift trust regulates a beneficiary’s access to the funds or assets that are held in the account. Instead of a beneficiary receiving the funds in the trust all at once, they are released incrementally.
• Asset protection trusts — An asset protection trust is one of the many different types of trusts that can be used to protect assets from creditor claims and lawsuits.
• Medicaid asset protection trusts (MAPT) — MAPT trusts can be set up to protect the creator’s eligibility for Medicaid benefits in the future.

To be effective, a trust must be funded. A trust can be funded with nearly any property, including cash, real estate, personal property, investments, business interests, or intellectual property. Depending on the type of asset that is being used to fund the trust, property may need to be retitled in the name of the trust or an assignment of ownership document may need to be signed. Transferring real estate into a trust typically requires a deed to be executed.

Learn More About the Different Types of Trusts in Minnesota

If you would like to learn more about the different types of trusts in Minnesota and how they can help you meet your estate planning goals, a knowledgeable estate planning attorney can best advise you. At Mundahl Law, we work closely with our clients when it comes to their estate planning matters and know how to structure trusts in a way that will accomplish their objectives. Located in Maple Grove, Mundahl Law provides estate planning services to clients throughout Minnesota. To learn more about how we can assist you, or to schedule an appointment, contact Mundahl Law at 763-575-7930 or click schedule a consultation to speak with our Client Advocate.