Aside from having a last will and testament, it’s recommended for sophisticated estate plans to have a trust arrangement.
Understanding Trust
A trust is a legal account arrangement managed by an organization or an individual, for the benefit of another. In general, it consists of a:
- Trustor
Also known as grantor or settlor, the trustor is the one who establishes the trust and transfers assets into it.
- Trustee
The trustee is the person or entity responsible for managing the assets according to the wishes of the trustor. They temporarily hold onto the property and don’t have direct ownership of it. Also, they have the fiduciary responsibility to operate in the best interests of the trustor and the beneficiaries and should execute the mandates outlined in the trust arrangement.
- Beneficiaries
Similar to a will, a trust can also have beneficiaries. They can be the trustor’s children, spouse, other family members, or even a close friend. Other than that, a trustor can also name a charitable organization as their trust beneficiary.
As trust beneficiaries, they’re entitled to receive assets from the trust based on the trustor’s wishes.
Revocable vs Irrevocable Trust
Before diving into the specific types of trust available to you, it helps to understand the two main categories of trust— revocable and irrevocable. Below is a discussion about how to tell if a trust is revocable or irrevocable and the differences between the two.
- Revocable Trust
A revocable trust is basically a living trust since it’s created while the trustor is still alive. The name refers to the fact that the trust terms can be changed during the trustor’s lifetime.
The main goal of a revocable trust is to avoid probate costs that come with the transfer of assets after the trustor’s death. This means that the assets in the trust will go to the beneficiaries without passing through probate court. As a result, it allows for greater privacy than a last will and testament can guarantee.
Plus, it can be more challenging for creditors to get the assets held in a revocable trust to satisfy any outstanding debts.
- Irrevocable Trust
As its name implies, an irrevocable trust can’t be changed once the trust is finalized. No one, including the trustor, can take the property out of the trust arrangement. The main reason for creating an irrevocable trust is that it can work as a safeguard, creating a safe haven for the placement of assets. These trusts can protect your assets from claims of beneficiaries, creditors, or even Medicaid.
In addition, this type of trust can also remove some assets from your estate, safeguarding them against gift or estate tax. Thus, it’s an appealing option if you have larger estates and want to minimize tax liability and increase protection on those withholdings.
Special Types Of Trusts To Choose From
Other than the two major categories featured above, there are various special kinds of trust you may want to incorporate into your estate plan. The type of trust you can use will depend on your interests.
- Marital Trusts
A marital trust is established by a spouse for the benefit of their significant other. In the event that the trustor passes away, the assets in the trust as well as any income generated by the asset are given to the surviving marital partner.
- Charitable Trusts
This type of trust allows you to create a legacy of giving in your estate plan. In general, there are two types of charitable trust:
- Charitable Lead Trust
A charitable lead trust allows you to give certain assets to a specific charity or philanthropy and the rest will be given to your beneficiaries.
- Charitable Remainder Trust
On the other hand, a charitable remainder trust permits you to obtain income from your assets for a specific period, with the remaining assets or income going to a designated charity.
- Bypass Trust
Also known as a credit shelter trust, a bypass trust is often established by married couples to protect their heirs from high estate tax impact.
This is a type of irrevocable trust, transferring assets from one spouse to another after death. Still, the surviving spouse doesn’t hold the assets directly and is managed by the trustee instead.
Only once the surviving spouse dies, the remaining assets go to the designated beneficiaries, free from estate tax.
- Special Needs Trust
If you have a child, parent, or sibling with special needs, then a special needs trust can help provide for them after you die. It does this without preventing their eligibility to receive government benefits. The funds in the trust allow the beneficiaries with special needs to pay for their daily needs and medical care.
- Generation-Skipping Trusts
If you want to transfer your assets to your grandchildren instead of your children, a generation-skipping trust is your best option.
It allows you to pass your assets to your grandchildren while allowing your children to steer clear of paying for expenses in the process. You also have the option to allow your children to have access to any income generated by those assets.
Conclusion
And there you have it. The abovementioned feature has hopefully provided you with enough details on which types of trust are best for your needs and case.
Regardless of what you choose, adding a trust arrangement to your estate plan is believed to be a smart move that permits you to protect your and your beneficiaries’ best interests after your passing.
