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When it comes to estate planning, trusts are among the most powerful and flexible tools available. One of the great things to understand about trusts is that there are many different types of trusts, each designed to accomplish a certain purpose (such as protecting assets, minimizing taxes, or planning for loved ones with special needs). Having choices is usually a blessing. Yet for many Ohio families, the sheer number of options can be overwhelming. Understanding your options is the first step in creating a plan that truly reflects your wishes.
In this post, we’ll give a brief (and not comprehensive) answer to the question of what are the different types of trusts, and we’ll focus on ten types commonly used in estate planning.
At its core, a trust is a legal arrangement that allows one party (the trustee) to manage property on behalf of another (the beneficiary). The person who creates the trust is known as the grantor or trustmaker. Trusts can be revocable (changeable during the grantor’s lifetime) or irrevocable (generally unchangeable once established).
When asking what are the different types of trusts, it’s always important to keep this distinction between revocable and irrevocable trusts in mind. Ohio law recognizes both revocable and irrevocable trusts, and these instruments are governed under Title 58 of the Ohio Revised Code.
A bypass trust is also known as a credit shelter trust, family trust, or a B trust. It is designed to help married couples reduce or avoid federal estate taxes. Upon the death of the first spouse, a portion of their estate is transferred into the bypass trust, using their lifetime estate tax exemption. This money “bypasses” the surviving spouse’s estate and is not subject to estate tax upon their death.
Ohio context: While Ohio does not currently impose a state estate tax (repealed in 2013), bypass trusts are still useful for high-net-worth individuals concerned about federal estate taxes, particularly if Congress changes exemption thresholds in the future.
A charitable lead trust pays a designated charity an income stream for a set term or for the life of the trustmaker. After this period, the remaining assets go to the grantor’s heirs, often with significant estate and/or gift tax savings.
Example: Suppose a Columbus resident funds a CLT that pays annual income to the Columbus Foundation for 15 years. After that term, the remaining assets pass to his children.
This is the inverse of a CLT. A charitable remainder trust provides income to the trustmaker or another non-charitable beneficiary for life or a term of years, and then distributes the remainder to a qualified charity.
Example: A Cleveland resident could contribute appreciated stock to a CRT, receive income from it during her lifetime, and avoid immediate capital gains taxes. Upon her death, the remainder goes to her chosen nonprofit.
A special needs trust allows you to provide for a loved one with disabilities without disqualifying them from means-tested government benefits such as Ohio Medicaid or Supplemental Security Income (SSI). These trusts must be carefully drafted to comply with applicable law at both the federal and state levels.
Example: A Dayton couple creates a special needs trust for their adult son who receives Medicaid benefits due to cerebral palsy, allowing him to receive inheritance without losing his coverage.
Generation-skipping trusts allow assets to be transferred to grandchildren or later generations, bypassing the children and potentially avoiding estate tax at that middle tier. These trusts are designed to maximize wealth transfer by skipping one level of taxation.
Tax Note: GSTs utilize a specific federal GST tax exemption. They are less common in Ohio due to the repeal of the state estate tax, but may still be beneficial for large estates.
A GRAT is an irrevocable trust in which the grantor retains the right to receive annuity payments for a set period based on the value of the property in the trust. After the term ends, remaining assets go to named beneficiaries, often with minimal gift tax consequences. This type of trust is used to make large financial gifts to your loved ones of accounts or property that are expected to grow in value at a higher rate than the annuity rate being paid back to you.
Ideal Use: Transferring assets expected to appreciate (like shares in a family business or real estate in booming areas like Dublin or Westlake) to heirs while minimizing tax exposure.
An ILIT is created to own and control a life insurance policy, keeping the policy proceeds out of the grantor’s taxable estate. This can be especially valuable for high-value policies, as the benefit of this type of trust is that the life insurance proceeds are excluded from the deceased’s estate for tax purposes. However, the proceeds are still available to provide liquidity to pay taxes, equalize inheritances, fund buy-sell agreements, or provide an inheritance.
Ohio relevance: Although Ohio doesn’t have a state estate tax, ILITs are still used to shield federal estate tax and to ensure liquidity for paying final expenses, taxes, or funding buy-sell agreements in business succession planning.
A marital trust protects a deceased spouse’s estate by deferring taxes until the death of the surviving spouse. In other words, property excluded from estate tax at the first spouse’s death is included in the surviving spouse’s estate for tax purposes.It allows for the unlimited marital deduction, meaning assets transferred to the surviving spouse are not taxed at the first death.
A qualified terminable interest property trust provides income to a surviving spouse, but gives the grantor control over designating who receives the trust’s principal after the surviving spouse’s death. This type of trust qualifies for the unlimited marital deduction, and is commonly used in second marriage situations and to maximize estate and generation-skipping tax exemptions as well as tax planning flexibility.
Example: An Akron resident uses a QTIP trust to provide income for the remaining life of her second husband, but also specifies that her children from her first marriage inherit the principal after the passing of her second husband.
Unlike the other trusts on this list, which are created during the grantor’s lifetime, a testamentary trust is created through a will and only takes effect upon death. It is commonly used to protect the money and property on behalf of a beneficiary as opposed to transferring the money and property to the beneficiary outright. Use cases include when a beneficiary is too young to manage their own money or property, has medical or drug issues, or may be incapable of responsibly managing their own money.
This type of trust also provides a measure of asset protection from lawsuits, or a claim by a divorcing spouse brought against the beneficiary. Unlike a revocable living trust or an irrevocable trust, where property should be transferred into a trust during the trustmaker’s lifetime to work property and avoid probate, testamentary trusts require the sometimes lengthy and expensive probate process before the trust is created.
Every family’s circumstances are unique. Here are some key considerations as you evaluate your options for which trust best suits your goals and objectives:
If you are an Ohio resident trying to learn more about what are the different types of trusts, it’s important that you speak with an experienced Ohio estate planning law firm. Creating a trust without proper legal guidance can lead to unintended consequences, including unnecessary taxes, probate delays, or disqualification from public benefits. The right estate planning team can help you determine whether it makes sense to include a trust in your estate plan, and select and customize the right trust (or combination of trusts) to fit your personal goals and objectives for protecting your legacy.
At Rhodium Law, we help Ohio families make informed decisions about their estate plans. Whether you’re just starting your estate planning journey or need assistance reviewing and revising your current plan, we’re here to help. Together, we’ll design a tailored estate plan that reflects your values, supports your loved ones, and stands the test of time. Schedule a strategy session today!
