An Idaho Trust Primer Part 3
Types of trusts
While trusts all have common elements, in particular the three roles necessary to create a trust: grantor, trustee, and beneficiary, the differences are almost endless. The following is a list of some of the more common uses of trusts. The list is not meant to be exhaustive.
Estate planning, to avoid probate
Estate planning, to avoid the need for conservatorship
Estate tax planning
Income tax planning
Asset protection, for the grantor as beneficiary as well as for other beneficiaries
Protection of an individual with special needs
Preservation of special assets for future use, for example, the family cabin
Promotion of particular values, i.e., education trust, mission trust
Support of particular institutions, as noted above, such as church, schools, charitable organizations, organization for the protection of certain values
However, admit these different purposes, trusts can be identified by the common elements, such as for whom was the trust created, when was the trust created, can the trust be changed, etc.
The first party or self-settled trust is one created by the grantor for his own benefit. This is the typical estate planning trust referred to above. While these trusts work well for avoiding probate and conservatorship proceedings (as to the grantor), as a fairly standard rule, self-settled trusts provide no asset protection for the grantor-beneficiary. 
These self-settled trusts can also achieve a level estate tax, income tax and capital tax planning (however, often only after the grantor has died.)
The third party trust is one created by the grantor for the benefit of a third party beneficiary. These trusts are also often used in estate planning or the planning for family members. For example, if a grantor wishes to gift assets to a child or grandchild but has concerns about that’s person’s decision-making ability concerning the use of money, she can still make the gift, but to a trust instead of outright to the child. The grantor could appoint herself as the trustee and manage the assets and determine distributions for the beneficiary. The grantor could appoint a third party trustee who can ensure that the assets and resulting income is used effectively or in a way the grantor intended. A very common use of this trust is for use with gifts to a minor or an individual with diminished capacity.
When the trust is created is one more factor used in further defining the various types of trusts. A trust created by the grantor (while alive) is considered an inter vivos trust. Inter vivos trusts are often referred to as “living" trusts. A trust created at the death of the grantor is termed a “testamentary" trust. Especially for younger clients, estate planning practitioners will create a will that sets out the terms of a testamentary trust that is funded at the passing of the client for the benefit of minor children. The testamentary trust is usually a very straightforward and less expensive option for some clients.
A grantor has the option when creating a trust to retain the ability to change or revoke the trust or to make the trust irrevocable and forfeit the control to change the terms of the trust. With a revocable trust, the grantor maintains the maximum control possible. She can change her mind about any provision or about the use of a trust altogether. This control is what helps make the revocable living (inter vivos) trust the most common estate planning trust.
Although the grantor gives up a great deal of control with an irrevocable trust, the advantages usually offset that loss. The irrevocable trust is used in very specific situations where those advantages are quite evident. The advantage that is of most interest in the elder law or Medicaid practice is that of creating a legal identity distinct from the grantor. This can be advantageous for tax planning as well as asset protection. This distinction can help to preserve assets from Medicaid spend down.
Beneficiary Access to Principal/Income
Distributions by the trustee from the trust corpus or principal of the trust or the income from the trust are determined by grantor when fashioning the trust agreement or “instructions" for the trustee. The purpose of the trust determines the frequency and amount of distributions and whether the trustee is free to distribute both from principal and interest from the trust or from one or the other solely (or if, in fact, a distribution should be made at all at a given time).
A trust designed to preserve assets over a longer period of time may limit trustee distributions to income/interest only. In fact, the instructions of the trust may require the investment of all assets for the creation of income which then is distributed to the beneficiaries. The grantor may want the assets invested for growth for a period of time with little or no income to be distributed while those investments grow. While this instruction seems straightforward, there are some issues to deal with including whether or not capital gains are to be considered income or an addition to principal. This becomes a real issue if the trust corpus is to be preserved to multiple generations of beneficiaries. Here’s an example of this standard:
Distributions of Net Income
At least quarter-annually, my Trustee shall distribute to Beneficiary all of the net income of her trust.
Distributions from principal will shorten the term of the trust. This may fit well within the grantor’s intention for the trust, especially if there is a limited amount of principal, or if the trust is specifically for a short period of time, i.e. until the beneficiary reaches the age of 18 or while the beneficiary finishes college.
A “unitrust" is a trust created to distribute all principal and any earned interest within a stated period of time. This is done by stated a percentage of the trust balance that is be distributed each year. For example, if the instructions dictate that 10 percent (10%) of the trust balance is to be distributed each year, principal and interest included in each distribution. If the principal is not earning return equal to or greater than the unitrust amount, the annual distributions will decline in value each year.  Here’s an example of that language:
 Contrary to common law, several states have now created by statue what are referred to as domestic asset protection trusts. These trusts will provide a level of asset protection to the grantor-beneficiary.
 Typically, a minimum amount of principal is identified that when the trust balance reaches that amount, the balance is distributed and the trust dissolved. This is usually based on the economics of paying trust expenses for a small trust balance.