The world of trusts is not one-size-fits-all. Your specific desires for the management of your assets both now and in the future should be reflected in the kind of trust you select.
According to Terry Ruhe, senior vice president and regional trust manager for U.S. Trust, “a trust can help you navigate specific tax concerns or creditor protection, ensure your wealth supports your family, or leave a legacy for a charitable cause you believe in.” S. Bank Wealth Management. “Whatever your wishes, there’s a trust for you. ”.
The two basic trust structures are revocable and irrevocable. The primary distinction is that irrevocable trusts usually cannot be altered after they are established, but revocable trusts can.
As previously mentioned, a revocable trust, also called a living trust, is one that is modifiable after it is established. A will and a revocable trust can be used for many of the same purposes. However, there’s one key difference,” says Ruhe. “You can avoid the probate process that accompanies the probate of a will by setting up and transferring your assets to a revocable trust.” A revocable trust is typically not public, but probate can be drawn out and quite public.
For some purposes, even though a trustee administers the trust on your behalf, you are still considered the owner of the assets because you have the ability to modify your revocable trust at any time. For instance, you’ll be in charge of filing tax returns and reporting on the trust’s investment returns, and the assets of a revocable trust are accessible to creditors and included in your estate.
Additionally, you can design your revocable trust to operate in multiple ways. When you pass away, you have the option to have your revocable trust terminate and have all of your assets given to your beneficiaries. It is also possible to configure it so that, upon your demise, the revocable trust automatically establishes irrevocable trusts for other individuals or organizations.
An irrevocable trust cannot normally be altered once it is established. The trust pays its own income tax and files a separate return after the assets leave your estate. You may be better protected from creditors and estate taxes as a result.
As previously mentioned, you can designate revocable trusts or your will to establish irrevocable trusts automatically upon your death. A testamentary trust is what you create when you use your will to establish irreversible trusts. However, you can also create irreversible trusts while you’re still alive.
Depending on your particular situation, you can select from a range of irrevocable trust types. “Choosing an irrevocable trust that best suits your needs depends on why you are creating one,” says Ruhe. Are you setting up a trust to:
The following situations can be resolved with a particular kind of irreversible trust:
What are the 3 types of trust?
When planning your estate, you may consider establishing a trust to manage your assets and ensure their distribution according to your wishes after your passing. Trusts offer numerous benefits, including avoiding probate, minimizing estate taxes, and controlling how your assets are distributed. However, with various types of trusts available, understanding their differences and determining the most suitable option for your needs can be challenging. This guide provides an overview of the three primary classes of trusts: revocable trusts, irrevocable trusts, and testamentary trusts.
Revocable Trusts
A revocable trust, also known as a living trust, allows you to retain control over your assets while they are held within the trust. You can modify or revoke the trust at any time during your lifetime. This flexibility makes revocable trusts ideal for individuals who want to maintain control over their assets while avoiding probate.
Benefits of Revocable Trusts:
- Avoid probate: Assets held in a revocable trust bypass the probate process, saving your beneficiaries time and expense.
- Maintain control: You retain control over the assets in the trust and can modify or revoke it at any time.
- Manage assets during incapacity: You can designate a successor trustee to manage your assets if you become incapacitated.
- Privacy: The terms of the trust are private, unlike a will, which becomes a public document during probate.
Irrevocable Trusts
Unlike revocable trusts, assets placed in an irrevocable trust cannot be removed or amended after they have been transferred. This relinquishing of control removes the assets from your taxable estate, potentially reducing your estate tax liability.
Benefits of Irrevocable Trusts:
- Reduce estate taxes: Assets in an irrevocable trust are not part of your taxable estate, potentially reducing your estate tax liability.
- Protect assets from creditors: Assets in an irrevocable trust are generally protected from your creditors.
- Provide for specific needs: Irrevocable trusts can be used to provide for the specific needs of beneficiaries, such as a child with special needs.
Types of Irrevocable Trusts:
- Charitable remainder trust: Provides income to beneficiaries for a specified period, after which the remaining assets are donated to a charity.
- Grantor retained annuity trust (GRAT): Allows the grantor to receive an annuity for a specified period, after which the remaining assets are transferred to beneficiaries.
- Irrevocable life insurance trust (ILIT): Holds a life insurance policy, with the death benefit paid out to beneficiaries without incurring estate taxes.
Testamentary Trusts
A testamentary trust is created through a will and takes effect upon your death. This type of trust offers flexibility in assigning a trustee and managing assets for minor children or other beneficiaries who may not be able to manage their inheritance responsibly.
Benefits of Testamentary Trusts:
- Flexibility: You can specify the terms of the trust in your will, including who will receive the assets and how they will be managed.
- Avoid probate: Assets held in a testamentary trust may avoid probate, depending on the specific terms of the trust.
- Provide for minor children: You can use a testamentary trust to manage assets for minor children until they reach a certain age.
Considerations Before Establishing a Trust:
- Cost: Setting up and administering a trust can be expensive. Consult with a financial advisor or estate planning attorney to determine if a trust is right for you.
- Complexity: Trusts can be complex legal documents. It’s essential to work with an experienced attorney to ensure your trust is properly drafted and meets your needs.
- Tax implications: Different types of trusts have different tax implications. Consult with a tax professional to understand the potential tax consequences of establishing a trust.
Understanding the different types of trusts and their benefits can help you determine the best option for your estate planning needs. Whether you choose a revocable trust, an irrevocable trust, or a testamentary trust, working with a qualified financial advisor or estate planning attorney can ensure that your assets are managed and distributed according to your wishes.
It’s crucial to keep in mind that creating a trust can be highly costly before implementing one into your estate plan. Before including a trust in your estate plan, make sure it makes sense for you by speaking with your financial advisor or an estate planning attorney.
There are several advantages that you and your loved ones can receive from including a trust in your estate plan, including avoiding probate, reducing potential estate taxes, and gaining more control over how your estate is distributed after you pass away.
It is feasible to establish a trust that takes effect upon your death as opposed to establishing and funding one right away. This kind of trust, called a testamentary trust, is established by a will, and the terms of the trust are specified in the will. Testamentary trusts are frequently employed as a tool to assist in setting up a trust on behalf of minor children. Although a testamentary trust’s assets might be subject to probate, the flexibility it provides in choosing a trustee might outweigh the trust’s expenses.
JIM SANDAGER, MBA, CFP, is a Senior Vice President-Financial Advisor at Wealth Enhancement Group® and co-host of “Your Money” on News Radio 1040 WHO on Sunday mornings. Securities offered through LPL Financial, member FINRA/SIPC.
There are many different types of irrevocable trusts. One typical illustration is the irrevocable life insurance trust (ILIT), which is a life insurance policy whose death benefits can be distributed to your heirs or used to partially pay for estate administration expenses without triggering taxation.
Charitable remainder annuity trusts
You can leave a long-lasting charitable legacy with the aid of certain irrevocable trusts, like a charitable remainder annuity trust. In this case, you can design the trust to initially provide income to the primary beneficiaries (your children, for example), with any remaining assets going to a charity of your choosing.
Alternatively, you could set it up so that the trust pays income to the charity and then ends after a set amount of time, leaving your children with the remaining assets. In addition, if you establish this kind of trust in advance for a charitable donation, you might be eligible for an income tax deduction.
You may want to think about creating a special needs trust if you have a child or family member with a disability. Generally, special needs trusts are established for people who qualify for government assistance because of a disability. This kind of trust can be established to take care of that person in addition to government assistance.
Giving money to a special needs child outside of a trust may prevent them from being eligible for Supplemental Security Income (SSI). You can take care of your child and make sure they remain eligible for government benefits by setting up a special needs trust. Learn more about how families with a disabled child can prepare their finances.
10 Different Types of Trusts
FAQ
What type of trust is best?
What is the most common form of trust?
What is better revocable or irrevocable trust?
What are the risks of an irrevocable trust?
What are the different types of trusts?
There are many different types of trusts including revocable and irrevocable trusts. Read on to find out which is best for you.
What are the different types of charitable trusts?
There are two types of charitable trusts you can establish: a charitable lead trust and a charitable remainder trust. A charitable lead trust allows you to earmark certain assets for a specific charity or multiple charities, with the rest of your assets going to your beneficiaries when you pass away.
What is an example of a trust?
A pot trust for example designates certain assets to a couple’s children after the death of the last surviving spouse. Education trusts set aside money for the specific purpose of higher education. There are also generation-skipping trusts. What Type of Investments Are Allowed in Trusts?
What types of assets can a trust hold?
Trust funds can hold a variety of assets, such as money, real property, stocks and bonds, a business, or a combination of many different types of properties or assets. The dynamic of every family is different, so it’s important the trust (s) you select to care for your loved ones after your death is well-suited to your loved ones’ needs.