Different Types of Trusts
What are your plans for your estate and assets after death?
It’s not something we like to talk about, but regardless of wealth, age, or amount of assets, you should have an estate plan created to ensure your last wishes are met.
When you create an estate plan, it should include a type of trust to not only avoid probate, but also protect you and your family from unexpected taxes, family arguments, stress, and more.
But what are the most common types of trusts? How do you know which is right for your situation? In this article we give a brief overview of them and explain a few advantages of having a trust in place.
What is a Trust?
Trusts are legal documents that ensure your assets will get into the right hands at the right time. Depending on your unique situation, there are several types of trusts that will accomodate to your wishes. However, for all trusts, one thing remains the same, establishing one will save you and your beneficiaries time, stress, and possible estate taxes!
What is the Purpose of a Trust?
There are a variety of purposes behind creating a trust. However, people usually create them so that they have a legal document stating that the trustee agrees to accept, manage, and protect assets delivered by the trustor.
Many people create revocable living trusts to hold assets while they're alive. These trusts then become irrevocable upon their death. The purpose for doing this is to avoid the time and expense of probate, as well as to provide instructions for the management of their assets in the event they become incapacitated.
Advantages of Trusts for Estate Planning
When it comes to estate planning, creating a will is standard so that your assets are distributed as you wish after you pass away. Unlike wills, trusts offer unique benefits to you and your family, such as:
Pass on assets without going through probate – Assets in a trust typically do not have to go through probate in order to be verified and distributed.
Privacy – Trusts allow you to keep your financial matters out of the public view and keep everything as private as possible.
Responsibly provide to heirs – An heir and beneficiary are not the same thing. An heir is a relative who is legally entitled to an inheritance from a deceased relative's estate when the decedent did not have a legal last will and testament. A trust ensures your assets go to whom you properly intend.
Creates a plan for managing assets – Rather than everything, and everyone, being in chaos, a trust allows a trustee to legally manage and distribute all of your assets.
Establish rules for beneficiaries to receive their assets– One of the roles of the trustee is to manage assets in the best interests of the beneficiaries, with regards to any last wishes or instructions. This means requiring certain milestones be met, self-improvement, or payments in certain amounts.
Flexibility – A revocable trust also allows you to change the terms of your agreement at any time. While this does not protect you against creditors and lawsuits, it does allow for flexibility as life changes.
Reduce taxes - A revocable trust may lead to tax advantages, depending on the terms. However, an irrevocable trust does have tax benefits because you have transferred assets out of your estate.
Help during disability or illness (not just death) – If you set up a revocable trust during your lifetime, your trustee can make decisions and distributions on your behalf. This means if you’re unable to manage your assets due to an illness or accident, they can legally pay bills, file tax returns, and manage assets.
Different Types of Trusts
There are several types of trusts to choose from when estate planning. Each comes with its own set of advantages, and each is made for unique situations. Here are some of the most common types of trusts:
Revocable Trusts – Revocable trusts can be modified or revoked entirely throughout the lifetime of the trustor (you). This type of trust is very helpful in avoiding probate.
Irrevocable Trusts – Irrevocable trust cannot be changed once they’re set and filed. Once a property is transferred to an irrevocable trust, no one, including the trustor, can take the property out of the trust.
Living Trust – A living trust allows you to hold your assets during life and then a trustee distributes them to the people of your choosing upon death.
Testamentary Trust – You’ll find a Testamentary Trust in a last will and statement. The purpose is to provide for distribution of all (or part) of your estate, including proceeds from life insurance policies.
Charitable Trusts – Charitable trusts benefit a charity named by the trustor during estate planning. These are typically free of estate and gift taxes.
Life Insurance Trusts – A life insurance trust is a trust that owns the eventual proceeds of your life insurance policy. Once this trust is created, you’re no longer the legal owner of the insurance policy—the trust is.
Marital Trusts - A marital trust is an irrevocable trust that allows you to transfer assets to a surviving spouse tax free.
Special Needs Trusts – When a Special Needs Trust is established, you’re allowing the beneficiary to obtain your gifts without taking away their eligibility for government benefits.
Do You Need a Trust?
Who benefits most from a trust?
It depends a lot on your personal and financial situation. However, if you have any wishes that you want carried out in the event of your death or disability, or estate that you want to be distributed, then you need some type of trust.
A trust allows you to control how your assets are managed during your lifetime and can specify certain conditions before distribution of assets.
Revocable living trusts are often the most flexible option for many individuals. With this type of trust, you give up nothing while gaining the assurance that your wishes will be carried out if something happens to you.
However, if you have a substantial amount of wealth and assets, you will probably need more protection from another type of trust, such as an irrevocable trust.
An estate planning attorney can help you think through things like the different types of trust, and which is the best option for you. They can also find a trust that supports the goals of your estate plan and will allow you to carry out your wishes. It’s not about discussing an account strategy, but rather finding someone who truly understands your needs and getting help with the best path forward that will benefit you and your family.