This page includes trust definitions from "A" through "K." For the second half, including trust definitions from "J" through "Z," CLICK HERE.
A-B Trusts Planning: The term A-B Trusts is a term used to explain the benefits of using both a Credit Shelter Trust and a Marital Deduction Trust in the planning of the first spouse to die. Using this planning, a married couple’s estate planning documents include wording that will set up a Credit Shelter Trust and a Marital Deduction Trust upon the death of the first spouse to die. Using these two trusts, assets placed in the Credit Shelter Trust will be taxed upon the death of the first to die. Assets placed in the Marital Deduction Trust, because of the ability to move assets to a spouse at death without tax consequence, will be taxed in the estate of the second to die. Therefore, with proper planning, each spouse’s lifetime estate and gift tax credit exemption amount can be utilized to the fullest extent possible.
Accumulation Trust: A trust by which the governing trust instrument instructs the trustees to accumulate the income generated by the trust assets and the gains generated by the sale of the trust assets. Such accumulated income and gains will eventually be distributed to the ultimate beneficiaries. Many states impose restrictions on the periods of time that a trust can accumulate income and gains.
Active Trust: A trust that requires active management from the trustee. Compare with “Passive Trust,” below.
Affidavit of Trust: An affidavit signed by the trustee stating that a trust is in place and giving details (the extent of which varies depending on the context in which the affidavit is being used) of certain provisions of the trust.
Alimony Trust: A trust funded by one ex-spouse to secure alimony payments to the other ex-spouse.
Annuity Interest: In the trust context, this refers to a payment made regularly (usually annually) that is a the same set dollar amount each time the payment is made. Compare with “Unitrust Interest,” below.
Bank Trust: See “Totten Trust,” below.
Beneficiary: One who benefits under the trust document.
Blind Trust: A trust used to give management and decision-making powers over investments to someone not under the settlor’s control. Such trusts are used by individuals to avoid potential conflicts of interests.
Bond Trust: A trust funded with bonds in which the income is generated by the bond interest.
By-Pass Trust: See “Credit Shelter Trust,” below.
Charitable Lead Trust (“CLT”): A Charitable Trust in which an income stream is given to a charity. Upon the termination of the income stream (usually after a term of years or an individual’s life), the remainder of the assets in the trust are given to a non-charitable beneficiary (which could be the grantor). In addition to the benefit going to the charity during the term of the income stream, a significant benefit of this type of trust is that the grantor receives a charitable deduction upon its formation. A CLT may be either a Charitable Lead Annuity Trust or a Charitable Lead Unitrust (see definitions below).
Charitable Lead Annuity Trust (“CLAT”): A Charitable Lead Trust that is drafted so that the income stream is paid in equal installments over the period of the income interest. For example, a CLT that pays $6,000 each year for a term of years to a non-charitable beneficiary, with the remainder going to a charity, is a CLAT. Compare with “Charitable Lead Unitrust,” below.
Charitable Lead Unitrust (“CLUT”): A Charitable Lead Trust that is drafted so that the income stream is paid in amounts that represent a set percentage of the trust corpus. Such payments are determined by recalculating the payment each pay period. For example, a CLT that pays 6% of its remaining corpus each year to a non-charitable beneficiary, with the actual dollar amount of the payment recalculated each year by multiplying 6% by the remaining corpus, is a CLUT. Compare with “Charitable Lead Annuity Trust,” above.
Charitable Remainder Trust (“CRT”): A Charitable Trust in which an income stream is used for the grantor or another non-charitable beneficiary. Upon the termination of the income stream (usually after a term of years or an individual’s life), the remainder of the assets in the trust are given to the charitable beneficiary. In addition to the benefit going to the charity at the end of the income term, a significant benefit of this type of trust is that the grantor receives a charitable deduction upon its formation. A CRT may be either a Charitable Remainder Annuity Trust or a Charitable Remainder Unitrust (see definitions below).
Charitable Remainder Annuity Trust (CRAT): A Charitable Remainder Trust that is drafted so that the income stream is paid in equal installments over the period of the income interest. For example, a CRT that pays $6,000 each year for a term of years to a charity is a CRAT. Compare with “Charitable Remainder Unitrust,” below.
Charitable Remainder Unitrust (CRUT): A Charitable Remainder Trust that is drafted so that the income stream is paid in amounts that represent a set percentage of the trust corpus. Such payments are determined by recalculating the payment each pay period. For example, a CRT that pays 6% of its remaining corpus each year to a charity, with the actual dollar amount of the payment recalculated each year by multiplying 6% by the remaining corpus, is a CRUT. Compare with “Charitable Remainder Annuity Trust,” above.
Charitable Trust: A trust established for the benefit of a charitable organization.
Claflin Trust: See “Indestructible Trust,” below.
Clifford Trust: Prior to the enactment of the grantor trust rules of I.R.C. §671 et seq., Clifford Trusts were formed in an effort to shift income to individuals in lower tax brackets than the person actually owning the assets. A typical Clifford Trust would transfer the income of assets for a period of ten or more years, after which the assets would re-vest in the grantor.
Community Trust: A business entity or agency established for the administration of funds placed in trust for the public benefit.
Complex Trust: A trust in which the trustee may distribute or retain income. See I.R.C. §§661-63. Compare with “Simple Trust,” below.
Constructive Trust: A type of Implied Trust. A Constructive Trust is implied by operation of law or act of a court, usually to compensate a party for a wrong at the hands of another.
Contingent Trust: A trust in which the trust agreement is drafted, but in which the trust relationship does not form until the happening of some future event.
Corpus: The principal of the trust. The assets that are in the trust at any point in time.
Credit Shelter Trust: This type of trust is used to protect the total estate tax credit exemption amount upon the first do die of a married couple. This trust is typically created in a Will or other testamentary document. The Credit Shelter Trust is formed to provide an ultimate benefit to beneficiary other than the surviving spouse. In a majority of cases, the surviving spouse will be given a life interest in the trust, therefore providing income for such surviving spouses life. Upon the death of the surviving spouse, the trust pays out to the ultimate beneficiary, thereby avoiding inclusion in the taxable estate of the surviving spouse.
Defective Grantor Trust: A trust that is drafted (intentionally or otherwise) so that it is a Grantor Trust (i.e., it is treated as owned by the grantor or other non-beneficiary) for one or more of Income Tax, Estate Tax, or Gift Tax purposes, but not for each of those purposes. As an example, a trust that is drafted to be an irrevocable trust with a third-party trustee and non-grantor beneficiary, but which allows the grantor certain restricted controls over the trust corpus, may be determined to be a grantor trust (i.e., owned by the grantor) for income tax purposes, but not for estate and gift tax purposes.
Direct Trust: See “Express Trust,” below.
Directory Trust: A trust that is only generally defined by the trust document and intended to be funded and administered by later instructions.
Discretionary Trust: A trust that is drafted to give the trustee the ability to apply as much of the principal and/or income to the benefit of the beneficiary as the trustee deems appropriate.
Dry Trust: A trust that changes the title in the trust assets to the trustee but requires no duties on behalf of the trustee.
Dynasty Trust: A trust that is statutorily authorized to continue for a very long time, typically many times the extent of using an ordinary statute of perpetuities timeline.
Educational Trust: A trust established for the benefit of educational activities or institutions.
Equipment Trust: A financing mechanism under which title to certain equipment is transferred to a trustee to ensure repayment on a purchase debt. The railroad industry has made extensive use of this trust.
Estate Trust: A trust that is established by one spouse, typically at that spouse’s death, for the benefit of the other (surviving) spouse during that other spouse’s life. The assets of the estate trust are then paid to the estate of the surviving spouse. This type of trust may be used to qualify assets for the marital deduction.
Executed Trust: A trust in which all of the relationships among the parties have been defined, the management of the trust assets has been defined, and all documents required have been signed. A trust that is complete and needs no further documentation to be completely effective. Compare with “Executory Trust,” below.
Executory Trust: A trust that requires the further drafting and/or execution of documents before it is completely effective. Compare with “Executed Trust,” above.
Exemption Equivalent Trust: See “Credit Shelter Trust,” above.
Express Trust: A trust created by the deliberate act of the settlor, usually in writing.
Fixed Trust: A trust under which the trustee can not exercise the trustee’s discretion. A Non-discretionary Trust.
Fixed Investment Trust: A trust that, under the terms of the trust agreement, can only invest in certain securities or investments. The amounts or proportions of the investments may also be specified under the trust agreement.
Foreign Trust: A trust created and administered under non-U.S. law.
Foreign Situs Trust: A trust that is treated for federal tax purposes as a non-resident individual because it is a Foreign Trust (defined above) or for other reasons.
Grantor: The individual or entity that moves assets to a trust. Such a person is said to “grant” assets to the trust. See also “Settlor,” below.
Grantor Retained Income Trust (“GRIT”). Such a trust is established by a grantor who sets up an irrevocable trust and retains an income interest in the trust for a term that is the earlier of a set term of years or the life of the grantor, with the remainder interest going to a third party if the grantor survived the term of years, and to the grantor’s estate if the grantor did not.
Grantor Retained Annuity Trust (“GRAT”): A type of Grantor Retained Income Trust (defined above) that provides for a payout in equal dollar amounts each period.
Grantor Retained Unitrust (“GRUT”): A type of Grantor Retained Income Trust (defined above) that provides for a payout of a set percentage of the remaining corpus each period.
Grantor Trust: A trust established with beneficiaries other than the grantor but which, for income tax purposes, remains owned by and taxable to the grantor. See I.R.C. §671 et seq.
Honorary Trust: A trust for a specific purpose which is non-charitable. Additionally, this type of trust has no determinable beneficiary. These trusts are usually not respected and are therefore unenforceable.
Illusory Trust: A relationship that appears to be a trust but does not transfer enough management rights of the trust assets to the trustee to be respected.
Imperfect Trust: See “Executory Trust,” above.
Implied Trust: A trust implied by the transactions of the parties through operation of law. An Implied Trust may be either a Constructive Trust or a Resulting Trust. Compare with “Express Trust,” above.
Indestructible Trust: A trust drafted so that the beneficiaries are legally unable to terminate the trust.
Insurance Trust: Generally, a trust drafted to hold insurance policies.
Intentionally Defective Irrevocable (or Income) Trust (“IDIT”): A trust that is intentionally drafted so that for income tax purposes, the transfer from the grantor to the trust is deemed not to have happened. Therefore, the grantor receives all the income tax benefits and obligations of the trust. However, for estate and gift tax purposes, the transfer to trust is respected, and the property is no considered part of the grantor’s probate estate at death.
This page includes trust definitions from "A" through "K." For the second half, including trust definitions from "J" through "Z," CLICK HERE.
