There are many types of trusts that can be included in an estate. Some trusts are “non-probate” property, which will automatically pass to the trustee and beneficiary, while others are more complicated and can be involved in the probate process. Trusts that are included in the estate will be discussed in this section. These trusts will already be established at time of death.
If you’ve been designated as a personal representative, figuring out which, if any, type of trust is located within the estate is crucial. Often times, due to the difficult nature of trusts, a lawyer can be of great assistance.
Revocable Trusts (Living Trusts or Inter Vivos Trusts)
If you are a personal representative, and dealing with a revocable trust, most, if not all of the assets within the trust will not be subject to probate. A revocable trust is designated solely by the grantor, and can only be altered or revoked by the grantor. Revocable trusts are still subject to the estate tax, do not protect assets from creditors, cannot be used to name a guardian for minors, and do not act as a replacement for a will or power of attorney. It is also entirely possible that there will be assets not located within the revocable trust that need to be dealt with through probate. This is not a total probate elimination.
A marital trust is typically funded through the deceased spouse’s assets. Estate tax is not paid on the assets until the second spouse’s death. The spouse who created the trust may determine who receives the remainder of the assets after the death of the surviving spouse. The surviving spouse may also have powers to determine who receives those assets, if that power was granted to them.
A second type of Marital trust is a Qualified Terminable Interest Property (QTIP). A QTIP is arranged so that the surviving spouse receives all the income from the trust, the surviving spouse can tell the Trustee to make the assets income-producing, but the power to determine who receives the remainder of the assets remains with the deceased spouse.
Credit Shelter Trust (Family Trust)
The purpose of a credit shelter trust is to reduce a married couple’s overall estate tax liability by using some or all of the first spouse to die’s tax exemption. This is a complex issue, but ultimately “shelters” the remaining assets from the estate tax at the time of the second spouse’s death by funding the trust with the assets at the time of the first spouse’s death.
A disclaimer trust allows a spouse to “disclaim,” or essentially abandon ownership of assets at the time of death. This is primarily done for estate tax reasons. The benefit goes to the surviving spouse, with the ability to assess the assets before being locked into a trust. Due to complex tax issues, it is best to deal with a lawyer if you have a disclaimer trust in the estate you are administering.