This article will provide the reader with a general description of various types of trusts and how they might be used in an estate plan for a Pennsylvania resident. For ease of reference, they are listed in alphabetical order rather than grouped by category, except for the definition of "trust". (See other articles about trusts at this website). This article does not cover all types of trusts but does describe the more common trusts used in estate planning in Pennsylvania.
Trust - a relationship created by one person (the Settlor or Grantor) in which some asset (the Corpus or Principal) is controlled by another person (the Trustee) for the benefit of a third person (the Beneficiary). Two or all three of the persons can all be the same person - that is the Settlor also can be the Trustee or the Beneficiary or both.
Bypass Trust - a trust created for a married person to take advantage of the unified credit in the Federal Estate Tax - sometimes referred to as a Credit Shelter Trust. The assets in this trust are not subject to the Marital Deduction but generally pass tax free to the children or other beneficiaries by taking advantage of the unified credit. The children usually receive their interests upon the death of the surviving spouse. The Bypass Trust was a technique that permitted a married couple to both use their individual unified credits, potentially doubling the amount they could pass tax free together. With the addition of portability to the Internal Revenue Code effective for year 2011, the technique became less necessary in many circumstances.
Charitable Trust - a trust established to benefit a charitable beneficiary. A properly structured charitable trust can result in reduced estate tax.
Charitable Lead Trust - a trust that contains both charitable and non-charitable beneficiaries where the charity receives an income interest and a non-charitable beneficiary receives the remainder interest in the future. It is often used in a will to give away very large estates on a deferred basis to lower the Federal Estate Tax cost of the gift.
Charitable Remainder Trust - a trust that contains both charitable and non-charitable beneficiaries where the non-charity receives an income interest, and a charitable beneficiary receives the remainder interest. It is often used as a gift during the donor's lifetime to give away appreciated property without incurring tax on capital gain and have the charity sell the property and convert it into income producing property. The income is paid to the donor under the terms of the trust.
Credit Shelter Trust - a trust created for a married person to take advantage of the unified credit in the Federal Estate Tax - it "shelters" the unified credit amount to save tax. Sometimes referred to as a Bypass Trust (See Bypass Trust).
Grantor Trust - a trust in which the Grantor of the trust is considered the owner of the trust for purposes of Federal Income Tax.
Inter Vivos Trust - a trust created by someone during his or her lifetime. This is contrasted with a trust set forth in someone's will that becomes effective only upon his or her death and is known as a Testamentary Trust.
Irrevocable Trust - a trust that cannot be changed or revoked once it is established. This type of trust is often used to transfer assets to avoid taxes on those assets at a later date.
Irrevocable Life Insurance Trust - a trust set up to own one or more life insurance policies and receive the proceeds from the policies upon the death of the insured person. The trust cannot be changed or revoked once it is established. It is generally used to keep the death benefits from the life insurance policy from being subject to Federal Estate Tax.
Living Trust - a trust established by someone during his or her lifetime. This term generally refers to a revocable trust (See article on this website about Pennsylvania Living Trusts).
Marital Trust - a trust for the benefit of a surviving spouse. Generally, it contains provisions that permit the property in the trust to pass to the surviving spouse or to be used for the benefit of the surviving spouse with the Federal Estate Tax or Federal Gift Tax deferred until the death of the surviving spouse.
Personal Residence Trust - a special type of irrevocable trust to which a person transfers his or her residence. Generally, the transferor retains the right to use the residence for a number of years in which the residence passes to another person or persons, usually the children of the transferor. It is typically used to remove the residence from the estate of the transferor for Federal Estate Tax purposes while reducing or eliminating Federal Gift Tax on the transfer by taking advantage of the discounted gift value resulting from the deferral of the ownership by the children. There are many detailed requirements including technical distinctions between a Personal Residence Trust and a Qualified Personal Residence Trust.
QDOT Trust - Qualified Domestic Trust - a special trust used for non-citizen spouses. It permits the deferral of Federal Estate Tax on gifts to spouses not United States citizens if its technical requirements are met.
QTIP Trust -Qualified Terminable Interest Property Trust - a trust created to take advantage of section 2056(b)(7) of the Internal Revenue Code, which permits the testator or donor to give his or her spouse an income only interest in the trust without giving the spouse the right to principal and still have the trust qualify for the marital deduction from Federal Estate Tax or Federal Gift Tax. The estate is given an option or election if to have the property qualify for the Marital Deduction, thus providing flexibility. Under the terms of the QTIP Trust, all the income must be paid to the spouse and no one but the spouse may receive any principal during the life of the spouse. There are also other, more technical requirements that are not addressed here.
Residuary Trust - a trust created to give away the residue of the estate. When the residue is given away in trust, the trust is referred to as a Residuary Trust.
Revocable Trust - a trust that can be changed or revoked - generally at any time.
Sole Use Trust - a trust established for the sole benefit of the surviving spouse - none of the income from the trust and none of the trust's principal can be used for anyone other than the surviving spouse during the lifetime of the surviving spouse. Generally this type of trust is used in Pennsylvania to qualify the trust for certain elections to defer Pennsylvania Inheritance Tax until the death of the surviving spouse.
Sprinkle Trust or Spray Trust - a trust that permits the trustee to give income ("sprinkle income") to and among various beneficiaries or give corpus ("spray corpus") to and among various beneficiaries as the trustee deems appropriate.
Standby Trust - a trust established - not for immediate use - but to be used if one or more conditions occur - for example, if the beneficiary becomes incapacitated.
Testamentary Trust - a trust that is created in a will and that becomes only effective upon the death of the Testator.
Total Return Trust - a trust in which the distributions to the beneficiaries are based on the total return of the trust rather than upon artificial distinctions between income and principal typical in a more traditional trust arrangement. A total return trust eliminates the potential conflict of interest between the interests of the income beneficiaries and remainder beneficiaries of a more traditional trust arrangement. In a more traditional arrangement, the income beneficiaries might want to maximize current income at the expense of capital appreciation, while the remainder beneficiaries might want to maximize capital gain at the expense of current income. The total return trust creates a situation in which both the income, and the remainder beneficiaries desire maximum total return because they both benefit from total return.
Unitrust - a trust in which one or more beneficiaries receives payments of a fixed percentage of the value of the trust assets as determined each year for a specified period (which could be the life of a beneficiary) after which time the assets (principal) pass to the remainder beneficiary or beneficiaries. Historically, this was one type of trust used for charitable trusts where the remainder beneficiary was a charity. This was a form of trust that qualified for the charitable deduction under the Federal Estate Tax law. Today, unitrusts are more widely used for non-charitable trusts, as one form of total return trust, to eliminate the potential conflict of interest between the interests of the income beneficiaries and remainder beneficiaries of a more traditional trust arrangement (See Total Return Trust).
For explanations of legal terms used here unfamiliar to you, see the article at this website on Estate Planning Terminology.
Warning - this page is not intended as legal advice. It is only for informational purposes. It is not a substitute for legal advice from an attorney based upon your own particular circumstances. The definitions are based on Pennsylvania and Federal law and not upon the laws of any other jurisdiction. The laws of other states may involve different definitions of the same or similar terms. Many of the items discussed above have additional requirements that are not discussed here for purposes of simplicity. You should consult with your attorney before taking any action or relying on any information contained here.
Copyright 2013 - 2014 Marc H. Jaffe