Types of Trusts FAQ

A revocable living trust is a written instrument that a grantor (or person establishing the trust) creates. Lifetime trusts are considered revocable. A trust may last the grantor’s lifetime with regard to the assets put into the trust. Unlike an irrevocable trust, the grantor keeps the power to amend or revoke the trust, including the power to regain the assets as an individual. The grantor can name the same person (including himself or herself) as the trustee and beneficiary.

The benefit of a revocable living trust is that it can be used to avoid the cost and time associated with probate. Additionally, it maintains the grantor’s privacy (a last will and testament is public) and can help to avoid potential challenges to a last will and testament. The trust can also be helpful in the event that the grantor becomes incapacitated.

An irrevocable trust in New York City is a legal arrangement whereby a grantor permanently transfers his or her ownership of specific assets to the trust. A lawyer cannot modify or amend this type of trust once it’s established, except in very rare circumstances.

The benefits of an irrevocable trust include shielding assets from creditors, protecting an inheritance by removing the assets from the grantor’s taxable estate, or qualifying for certain government benefits such as long-term care eligibility.

Irrevocable trusts include irrevocable life insurance trust, an asset protection trust, a special needs trust, and a grantor retained annuity trust.

An Irrevocable Life Insurance Trust or ILIT is a specialized legal arrangement in which a trust entity, rather than an individual, owns a life insurance policy, removing the death benefit that is part of the life insurance policy from a grantor’s taxable estate. This arrangement means that a New Yorker can avoid federal and state estate taxes on the proceeds of the policy and protect those funds from creditors. A grantor must make gifts to the trust to pay premiums to the life insurance, and this may qualify for the yearly gift tax exclusion. However, there can also be downsides—the grantor loses control over the life insurance policy and cannot change the beneficiaries down the road, in the event that relationships change.

A Qualified Personal Residence Trust (QPRT) in New York City is an irrevocable trust that is used to transfer someone’s home, whether a primary residence or a vacation residence, at a reduced gift and estate tax cost. The grantor keeps the right to live in the home without paying rent for a certain period of time. The benefit of a QPRT is that it allows a homeowner to transfer property from themselves to heirs in a low-tax lifetime transfer.

A testamentary trust is a legal arrangement created by a testator’s last will and testament. This type of trust doesn’t go into effect while the testator is still living. It will only be effective after the testator dies when his or her will expressly directs that a trust be put into place. People create this kind of trust in order to maintain control of when and how their assets are distributed after they die. One benefit of a testamentary trust is that it allows conditions to be put in place, such as graduating college, or it can specify that distributions be paid in installments, before an inheritance is distributed.

A Supplemental Needs Trust is a legal arrangement under EPTL section 7-1.12 that permits people with disabilities to receive funds and hold assets without becoming disqualified from needed government benefits like Social Security Insurance or Medicaid. This kind of trust can be used to cover supplemental needs that the government programs may not pay for.

A spendthrift trust is an arrangement whereby a beneficiary’s inheritance is protected against creditors, but the beneficiary is also limited in spending, assigning or pledging the trust assets. This allows a grantor to provide an inheritance while maintaining a bit of control when a beneficiary is known to have irresponsible behavior around finances.

A charitable trust is an irrevocable trust that is put in place to help philanthropic causes. The benefit is that a donor can transfer money or property to charity while also possibly obtaining tax deductions and reducing estate taxes.