A living trust, also known as an inter-vivos trust (Latin for “amongst the living”), is a trust set up by the grantor during their lifetime.
- The terms grantor, settlor, and trustor all mean “trustmaker,” but we use “grantor,” as it’s commonly used by most countries revenue services. However, “trustor” might be more specific to trusts.
- The grantor creates and transfers assets into the trust
- A trustee, manages the assets and make decisions about distributions.
- A beneficiary, receives income or principal from the trust during their/it’s lifetime, according to the trust’s terms in the founding statement.
Trust Type’s
- Testamentary Trust: A trust created through a last will and testament, established before the date of effect (the death of the person who creates it).
- Living Trust: A trust established during the lifetime of the person creating it, allowing for management and distribution of assets according to their wishes.
- Bare Trust: A simple trust where the beneficiary has an immediate right to the capital and income of the trust.
- Interest in Possession Trust: A trust where the beneficiary can receive income from the trust immediately, but does not have a right to the underlying assets.
- Discretionary Trust: A trust where the trustee has the discretion to distribute income and capital to beneficiaries according to their needs and circumstances.
- Irrevocable Trust: A trust that cannot be changed or revoked once established, often used for estate tax planning and minimizing taxes.
- Grantor Retained Annuity Trust (GRAT): A type of irrevocable trust where the grantor contributes assets and receives an annuity payment on a regular basis.
- Qualified Personal Residence Trust (QPRT): A type of irrevocable trust used to transfer a personal residence to beneficiaries while minimizing gift and estate taxes.
- Spendthrift Trust: A trust designed to protect assets from the beneficiary’s creditors and ensure the assets are used for their intended purpose.
- Protective Trust: A trust where the settlor specifies themselves as a beneficiary, often used to protect assets from creditors or predators.
A living trust is revocable, meaning the grantor can change it anytime during their lifetime. Typically, the grantor transfers some or all of their property into the trust. The grantor might also serve as the trustee or choose a family member, an independent professional trustee, or a corporate trustee.
The trust pays income to the grantor as a beneficiary and, if directed, to the grantor’s spouse and children. The grantor can also specify how the principal is used. Essentially, the grantor retains full control, which is why the RS require the grantor to pay the trust’s income taxes. For more on this, see: What’s the difference between a grantor and non-grantor trust?
After the grantor’s death, the trust can continue to benefit the surviving spouse and children until it terminates, often upon the surviving spouse’s death. Since the trust is funded during the grantor’s lifetime, there’s no delay in paying income to the beneficiaries after the grantor dies. This also saves on estate settlement costs, such as executor and legal fees, which are typically based on the probate estate’s value.