A client has recently inherited a substantial sum and is considering opening a trust account for their minor child. They want to ensure that the assets are managed professionally, that the child receives distributions at specified ages, and that the assets are protected from potential creditors or misuse. Which type of trust would best meet these objectives?
- AAn irrevocable trust.
- BA Totten trust.
- CA revocable living trust.
- DA testamentary trust.
Show answer & explanationAnswer & explanation
Correct answer: A. An irrevocable trust.
An irrevocable trust is the most suitable option. It removes assets from the grantor's estate, provides professional management, allows for specified distribution ages, and, crucially, protects assets from the grantor's creditors and potential misuse by the beneficiary once established. A revocable trust does not offer creditor protection. A testamentary trust is created upon death, and a Totten trust is a 'payable on death' bank account.
Why the other options are wrong
- B. A Totten trust is a simple 'payable on death' account, lacking the sophisticated management and protection features required.
- C. A revocable trust does not provide asset protection from the grantor's creditors.
- D. A testamentary trust is created by a will after death, not during the grantor's lifetime for immediate asset management.
Irrevocable Trust
A legal arrangement where assets are transferred to a trust and the terms cannot be changed or canceled by the grantor once established, offering strong asset protection and estate planning benefits.
- Assets are removed from the grantor's taxable estate.
- Provides protection from creditors and lawsuits.
- Terms are generally unchangeable, requiring careful planning.
Memory trick: Revocable can change; irrevocable is set; testamentary is after death; Totten is just a bank bet.