The world of estate planning is full of obscure and confusing terms, especially when it comes to trust language. To those who have no background in the field, listening to estate planning attorneys talk about trusts can be like listening to two people from a different planet. The terms lawyers use and the concepts they discuss, though important, are not things that most people have a lot of experience dealing with.
To give you a better understanding of trust language and how it applies to you when you make an estate plan, let’s take a little time to go back over some of the more important terms and ideas you might come across.
Living and Testamentary
A person who creates a trust is called a grantor or a settlor or a trustor. When the grantor creates a trust that takes effect during his or her lifetime, this is known as a living trust or inter vivos trust. On the other hand, some trusts do not come into effect until after the grantor has died. These are known as testamentary trusts because the grantor creates them through his or her last will and testament or in his or her living trust. Because the will doesn’t take effect until after the grantor dies, neither does the trust. A common testamentary trust is one that is established for an inheritance that is for a minor.
Revocable and Irrevocable
If the grantor wants to retain the ability to change the terms of his or her trust, it’s called a revocable trust. If the trust cannot be changed after the grantor creates it, it’s called an irrevocable trust. All testamentary trusts are irrevocable, while living trust in either be either revocable or irrevocable or may start out as revocable or become irrevocable after a certain event, for example, the death of the grantor.
Simple or Complex
Entirely apart from whether a trust takes effect during the lifetime of the grantor or whether it can be changed, you can also categorize the trust as being either simple or complex. These terms aren’t exactly legal terms, but are rather terms that describe how the trust operates for tax purposes. The difference between a complex and simple trust depends on how it distributes any income it makes.
While the definitions of either simple or complex trusts are a little complicated, a simple trust is one that must pay all of the income it generates to a beneficiary. A complex trust, on the other hand, is a trust that is not required to do the same.
In the end, choosing to create one specific type of trust over another is all up to you. As you might be able to tell from the terms used, there are numerous different types of trusts. One or more trust might be suited to your particular needs, which is why you need to consult with an experienced and qualified estate planning attorney before you decide to create them.