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How Trusts Work


Types of Trusts
There are many reasons to start a trust, one of which is to protect your assets before you get married in case you two split later down the road.
There are many reasons to start a trust, one of which is to protect your assets before you get married in case you two split later down the road.
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Trusts can be structured to achieve different outcomes, and some of the more popular strategies have their own names. What makes it a bit more difficult to sort out is that many trusts combine strategies. For example, an A-B trust includes an A, or marital, trust and a B, or bypass, trust. Here's a quick overview to help you make some sense of popular trust strategies:

A-B trust – This is set up by the grantor to pass assets to his or her spouse first, then to other beneficiaries upon the surviving spouse's death. In other words, if I die, all assets pass to my spouse. If my spouse dies, all assets pass to a new trust, then to our kids or some other beneficiary I name.

Marital trust – The A strategy in an A-B trust might be a marital trust or QTIP trust, which stands for qualified terminable interest property. These trusts are set up for the benefit of a surviving spouse upon the death of a grantor.

Bypass trust – The B in the A-B trust, this is the secondary trust that is created upon the death of the surviving spouse for the benefit of a secondary beneficiaries [source: American Bar Association].

Domestic asset protection trust – This is for the less happily married (or at least more cautiously married) folks who want to shield assets from creditors — including an ex- or soon-to-be-ex-spouse. It's an irrevocable trust, allowed in less than a quarter of U.S. states, that lets the grantor be a beneficiary. Call it the phantom prenup; it can protect young people with significant assets to lose [source: Pagliarini]. A young entrepreneur starting her own business, for example, might have a perfectly happy marriage. But if she transfers the ownership of her company into a trust before getting married, she keeps ownership of the company and its assets from being contested in a potential future divorce [source: Landers].

Life insurance trusts – If the family is expecting a substantial life insurance policy that could put your net worth in the estate-tax zone (estates of nearly $5.5 million or more in 2015 for federal taxes; states may tax smaller estates), a life insurance trust can be used to remove life insurance assets from the estate. These trusts must be irrevocable (they are sometimes known as ILITs), must be set up before the grantor's death and must have a grantor other than the trustee [source: Hannibal].

Living trust – Also known as an inter vivos trust, it's any trust that allows you to put assets in while you're alive. Revocable living trusts allow you to manage the assets in the trust and even change the trust during your lifetime. Revocable living trusts have a spot on the IRS scams list, not because they're illegal, but because they're often oversold and unnecessary.

Charitable remainder trust – Wealthy folks can transfer wealth via charitable trusts. The money is placed into the trust, and the grantor and beneficiaries can continue to receive distributions from the trust over a period of time. At the end of that period, the remainder goes to the charity.

Charitable lead trust – This is similar to the charitable remainder trust, but the charity is the beneficiary of the trust first for a period of time. At the end of that period, the remainder goes to beneficiaries, such as children or grandchildren, named by the trustee [source: Fidelity Charitable].


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