The Most Common Types of Trusts to Understand
If you’re just beginning to plan your estate or are confused about the different types of trusts out there, then here is your guide to better understand make the best decision for you or someone else.
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Introduction
It is not uncommon to hear people talking about trusts – even though we may not understand why. Sure, trusts are often used as a way to protect assets – especially when it comes to the end of life. But that can’t be the only reason to have a trust, right? Either way, there are a lot of terms that get tossed around that may leave your head spinning.
Just what is a trust? How do they work?
The more you can educate yourself, the more you will learn about the opportunities that are available to you. When it comes to trusts, learning about them and taking advantage of them may benefit you – and your loved ones.
Ready to get started? Let’s start with the basics – gaining a bit of understanding when it comes to the most common types of trusts.
Determine Your Need for a Trust
Before you can determine the type of trust you would need for your assets, you are going to need to decide why you want a trust in the first place. Different types of trusts do different things – what may work well in one person’s life may or may not work well for you.
So, why do people decide to use a trust? The answers are many, but here are a few of the most common reasons:
- A measure of protection to ensure that your assets are handled – and distributed – properly after you die.
- They are also a measure of protection to ensure that your assets are handled appropriately if you have declining physical or mental health.
- A means of keeping your estate out of probate.
- Reduce your estate taxes.
- A way to control assets, such as pay college tuition for grandkids, regardless of whether you are alive or not. In this case, a trust ensures that money can only be used for that purpose.
All in all, trusts allow a third party to handle your assets based on a set of very specific instructions. The exact reason why you want it is what will determine the type of trust you choose.
Revocable Trusts
A revocable trust – a common estate planning tool – comes with much flexibility that you don’t often see in other types. It allows the grantor to change the terms or remove them altogether. Often put in place when the individual is healthy, this trust lasts the span of a lifetime. Assets can be added and removed with ease, not getting distributed to the beneficiaries until death.
Life can get busy. People come and go in our lives. Our asset portfolio hopefully grows. A revocable trust knows this and allows for you to add or remove beneficiaries, add new assets, remove old assets, and so forth.
Perhaps one of the most enticing parts of this trust is that it can keep your estate private and out of probate. Instead, once the grantor dies, the trust is distributed to the beneficiaries according to the directions of the trustee. It is at this time when a revocable trust becomes irrevocable.
Irrevocable Trusts
An irrevocable trust is another common type of trust you may encounter. Differing from the aforementioned trust, this type does not allow you – the grantor – to amend, modify, or revoke the trust what it has been created. Once the terms are written, they remain permanently.
This is a private trust that also keeps your estate out of probate upon your death. Instead, the terms of the trust will give the trustee direction on how to distribute to the listed beneficiaries. Again, keep in mind that these instructions and the listed beneficiaries cannot be changed from the inception.
When you place your assets in this type of trust, it is essentially as if someone else owns it. Creditors, judgment holders, and various legal proceedings cannot touch the assets held in the trust. Having an irrevocable trust is a good idea for those who work in risky businesses or those heading for financial troubles. Though, transitioning assets to this trust just before a lawsuit or such occurs (or during) could be seen as shady practice causing it to be overturned.
It is important to keep in mind that, while they provide you with tax benefits and protect your assets from creditors and legal matters, irrevocable trusts are intended to be permanent.
Charitable Trust
Another fairly common type of trust is a charitable trust. This type of trust is often used to support causes, give back, and so on. Let’s say you want to share your wealth to help community organizations or specific causes you believe it. Rather than just sending a random check, you can offer continuous support with a charitable trust. Of course, the IRS also offers many tax benefits for using this trust.
There are different types of charitable trusts, some allowing the owner more control than others. No matter which type you choose, these trusts allow for you to receive an income for a specific amount of time – or until death. Meanwhile, the charity manages the assets in the trust.
Life Insurance Trusts
Lastly, a life insurance trust is an irrevocable trust that is created with a life insurance policy as the only asset. Once in place, the insured no longer owns his or her policy – leaving it to be managed by the trustee. Because the life insurance trust is usually exempt from estate taxes, this type of trust allows for cash to be set aside to handle this final tax payment that is associated with the estate.
So why do use a life insurance trust?
- It is often only a small part of a larger estate plan.
- Control how your life insurance policies are handled after you die.
- Protect your beneficiaries from having to pay estate tax.
Final Thoughts
Whether you are looking for something to help you manage your assets now or you are planning for the future when you are no longer here, navigating the world of estates and trusts can be very overwhelming. And, because you want to make sure you are protected and everything is done right, it is always recommended to speak to an attorney who practices in this area of law.
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