The first thing to know when learning all about trusts is that they are a tool for you to utilize. They help protect your financial interests. Either on your own behalf or on behalf of the person or persons you designate. There are a couple of different types of trusts. Today, we are learning all about trusts.
Types of Trusts
In the most basic sense, there are two types of trusts: living and testamentary. A living trust, sometimes referred to as a revocable trust, establishes itself while a person is still alive. On the other hand, a testamentary trust is set up within a person’s will. Then, upon their death, when the will goes into effect, the trust establishes itself. In order to establish a trust, three things need designating. Those three things are the grantor (the person creating the trust, sometimes called the trustor or settlor), the trustee (the person who is responsible for managing the trust), and the beneficiary (the person for whose benefit the trust was created).
Revocable Vs. Irrevocable
Under the banner of living trusts, there are both revocable and irrevocable trusts. The main difference between the two is that a revocable trust, as the name suggests, can be changed, amended, or withdrawn at any time. In contrast to a revocable trust, an irrevocably living trust is one that cannot be changed or withdrawn. The grantor is also unable to act as trustee of an irrevocable living trust. This type of trust only has certain asset protection or tax assessment benefits.
More often than not, if a person is creating a living trust, it is revocable. Revocable living trusts are to plan for mental decline or to prevent probate of assets. Probate of assets is when assets that the decedent solely owns under their name do not automatically pass to someone under the operation of law. Instead, they get sent to probate court for a judge to divide according to the deceased’s will or state statute. As a general rule, if an asset has a named beneficiary, it is not a probate asset. Things like houses or bank accounts owned under only one name are subject to probate.
Other types of Trusts
Other types of trusts do exist, but they are typically for a specific purpose. Credit shelter trusts, or sometimes bypass trusts, allow you to write a will bequeathing an amount to the trust that is up to but not in excess of the estate tax exemption. This allows the rest of the estate to pass to your beneficiary tax-free, regardless of any growth, forever.
Generation-skipping trusts, or dynasty trusts, allow you to bequeath assets tax-free to beneficiaries provided they are at least two generations younger.
Qualified terminable interest property trusts are used in situations where a family includes divorce, remarriage, stepchildren and the like. These allow the grantor to direct assets to specific relatives. The surviving spouse typically receives income from the trust, and the designated beneficiaries will receive the remainder of the assets upon the death of the surviving spouse.
There are many other specific types of trusts with specific goals and outcomes. Whatever your situation it is imperative that you speak with an estate planning attorney. An attorney helps you determine what best suits your needs and wishes. Additionally, they will help you convey those wishes yo your loved ones.