What this post covers:
- Why does the type of trust matter?
- What types of trusts are there?
- What about a pet trust or other terms?
What to consider in setting up a trust
After reading all about how wonderful trusts are, you may have decided to go ahead and get a trust set up. So, what’s the next step?
If you’ve decided to work with a lawyer, your lawyer should go through your financial circumstances and your wishes for how you want your estate handled. After reviewing that information, your lawyer will be able to recommend the type(s) of trust(s) which are best for you. From there, you can move forward with getting your trust (and perhaps other estate planning documents such as power of attorney and health care directives) set up.
If you plan to do-it-yourself (DIY) or use an online service, then you need to figure out what type of trust (or trusts in combination) are best for you, so that you can purchase/use the right templates for the outcome you want. Please be very careful and very thoughtful about this decision. DIY or online services may sound easier and cost less up front, but they also come with significant risks and ultimately can cost you even more time and money than working with a professional.*
This post explores the why and how for evaluating types of trusts. Please note that all of the following information assumes California law applies and is also designed to be a general educational tool and does not constitute legal advice.
Why does the type of trust matter?
Trusts are not a “one size fits all” proposition. There are a number of differences between trusts and this post examines a few of the key differences. Please note that the trust characteristics discussed are simplified as examples and are not comprehensive.
One key difference is with tax implications. For example, an intentionally defective marital deduction trust generally keeps all of the assets in the surviving spouse’s estate, which is potentially subject to estate tax, but then allows a second step-up in basis, which means that your beneficiaries can save on capital gains tax.
In contrast, a disclaimer trust allows the option for the surviving spouse to move a portion of the assets into a trust that bypasses estate taxes by using the federal exemption for the deceased spouse, but then no longer qualifies for a second step-up in basis at the death of the surviving spouse.
This means its important to figure out if your estate is likely to exceed the federal estate tax exemption (which is currently scheduled to drop significantly in 2026) and evaluate whether it is better to take the estate tax hit or the capital gains hit.
This is merely one example of the kind of tax implications that should be evaluated.
Ensuring Desired Outcomes
Different trusts also have different legal outcomes. As an example, if you use a standard probate avoidance trust then the surviving spouse is going to have full control of the estate after the first spouse’s death. This means they can change everything after the first spouse has died including changing beneficiaries. You may want your spouse to be able to change everything. Or, you may be concerned that they will re-marry and your assets will go to their new spouse. Also, if there are children from a prior marriage and you do not want your assets going to those children, you may not want to give your spouse full control after your death.
In contrast, a bypass (or A/B trust) allows you to ensure that your assets are used to support your surviving spouse while they are alive but then ensures that on the spouse’s death those assets pass the way you choose, and your spouse cannot change those terms.
Levels of Flexibility
In addition, some trusts are revocable which means you can change or abolish the trust at any time up until your death (or your spouse’s death, depending on the type of trust). Some trusts are irrevocable as soon as you set them up. This can provide benefits, such as income tax savings or creditor protection, but means your ability to change or modify terms is limited or non-existent.
Ultimately, you need to carefully think about your priorities and what you want the trust to accomplish. Then you need to evaluate the tax implications and legal implications of each type of trust to select the best option(s) for you. Finally, you should consider whether you are comfortable with an irrevocable trust or if you would rather sacrifice some of the benefits of an irrevocable trust in order to have the flexibility to make changes.
What types of trusts are there?
The types of trusts available to you depend on your marital and/or relationship status. This is primarily due to the tax code as some exemptions or deductions are only available to legally married couples, but also varies depending on whether you have a partner that you want to support after death and how much flexibility you want to give them.
Revocable trusts tend to be the most popular because they offer flexibility so you can change terms as your circumstances change and/or the tax and estate laws change. Popular revocable trusts include probate avoidance, disclaimer, lifetime, A/B, intentionally defective marital deduction, and QTIP trusts.
There are also a number of irrevocable trusts that may be beneficial to you depending on the size of your estate and your objectives. These commonly include irrevocable life insurance trusts (“ILIT”), intentionally defective grantor trusts (“IDGT”), irrevocable special needs trusts, educational trusts, qualified personal residence trusts, grantor retained annuity trusts, and charitable remainder trusts.
Please note that this is not an exhaustive list of all of the types of trusts that are available or could be considered.
What about a pet trust or other terms?
Generally speaking, in order to simplify the process (and keep flexibility) certain types of trusts are established on your death by the terms of your revocable trust. In that case, you will set up your trust so that on your death it creates sub-trusts such as a pet trust, special needs trust, or something else depending on your needs. Some trusts do need to be created on a stand-alone basis instead.
There are also a lot of different terms you can include in your trust document. For example, you can forgive a debt (such as a loan to a child), allow specific person(s) to purchase real estate from the trust for a specified percentage of fair market value, and draft provisions to help shelter assets from creditors or divorce claims. There are many other options and these are merely a few examples.
In sum, you will need to do your research on the types of trusts available, evaluate them carefully, and then also evaluate the specific terms within the trust to make sure they comply with IRS and other regulations and to make sure they are worded carefully in accordance with legal interpretation standards so your intent is effectuated.
Do you have more questions?
For expert help in putting together your estate plan, or to simply get some additional information, contact us for a free consultation.
*Please note that there are risks to drafting a trust yourself or using online services. There may be tax implications you fail to consider or calculate improperly if a tax professional is not involved in the process. In addition, there are certain legal requirements for various trust terms that must be followed in order to get the tax benefits. Further, you may not be aware of all of the options available to you or everything that should be considered under the circumstances. Finally, if you fail to properly word part of the trust, the estate may not be handled the way you intended.
Online services are not law firms and do not give legal advice or recommendations. They can explain their forms and the options you select as you go through their form filler, but they cannot give you legal advice which significantly limits the value you receive.
In addition, depending on the online service the form(s) may not be flexible enough to properly handle the distribution terms you want. In that case, if you try to put in terms to reflect your wishes it may result in conflicting terms or wording that is subject to interpretation and then a court may have to get involved (and may not make the findings you intended). In addition, if your trust is contested, you don’t get the benefit of having a lawyer who can be called to the stand to address your competency and intent. An online questionnaire cannot be called as a witness.