Of all the tools in estate planning, trusts may be the most powerful. Trusts can be adapted and customized to fit a wide variety of situations and accomplish many goals.
But this quality of trusts can also make them overwhelming for many people who are new to the estate planning process. Many people don’t know where to start.
In this blog post, we will try to cut through the confusion by laying out some of the major categories of trusts and showing how they can help you accomplish your goals.
Testamentary trusts
If you establish a testamentary trust, it goes into effect upon your death. In this sense, a testamentary trust is like a will, but it has distinct differences and advantages.
When your property is held in a trust, it a trustee manages the property on behalf of the named beneficiaries. Legally, you do not own it. And because you do not own the property, it is not counted as part of your estate when you die.
Because it is not part of your estate, the property is not subject to state or federal estate taxes and it does not have to go through the probate process. This means more of it can eventually go to your beneficiaries.
Compared to a will, a trust also gives you more control over the property after you are gone. The terms of the trust itself dictate how the property is to be distributed to the beneficiaries. For instance, if you have young grandchildren, you may wish for their inheritance to be held in trust until they reach age 21 or some other other milestone.
Living trusts
Here’s where trusts really stand apart from most other estate planning tools: Your trust can go into effect while you are still alive.
If you put your property in a so-called living trust, you can name yourself as a beneficiary and have the assets distributed to you according to a schedule for the remainder of your life. You might even name yourself as trustee, so you are in charge of managing the assets. You can also name a successor trustee and successor beneficiaries, so that after you die, management duties transfer to the new trustee, who will take care of the assets for the new beneficiaries.
Revocable and irrevocable
You can make your living trust revocable, meaning that you can alter its terms, change beneficiaries, change the trustee, or even dissolve the trust if you so choose. This arrangement gives you a great deal of control over the assets in the trust, but the tradeoff for this control is that you the assets are not fully protected. Your creditors may be able to recover some of the property from your trust.
You don’t have that risk with an irrevocable trust. Assets in an irrevocable trust are protected from creditors.
A testamentary trust is irrevocable, of course, but you can also create an irrevocable trust while you are still alive.
Learn more
When you are choosing what type of trust you want, think about your short-term and long-term goals. These should include goals during your lifetime and goals for after you are gone. It’s also important to think about how much control you want over the assets in your trust and how they will be distributed.
The issues involved are complicated, and it’s important to seek out experienced advice.