What Are The Main Types of Trust?
Trusts are legal arrangements that let a third party hold assets for the sake of a beneficiary. Those who form the trust are called trustors, settlors, or grantors. Irrevocable trustors may be called benefactors instead. Trusts are an integral part of the estate planning process and are one of the most important tools at your disposal. But, did you know there are varied types of trust?
Trusts are useful in that they bypass the probate process. This process can be time-consuming, expensive, and sometimes traumatic. In addition, your family’s privacy may be at risk during the probate as family disputes air. Your privacy can be further protected, as trusts are not necessarily made public records. There are also types of trust that greatly reduce tax burdens. Importantly, trusts also protect your assets from debtors. As you can imagine, this gives you elevated control of your assets. Trusts even allow you to name children as beneficiaries for your life insurance.
But what do we mean by “types of trust?”
The Four Major Types of Trust
When you – A trustor – Set up a trust, you form either a living trust or testamentary trust. Living trusts are also known as inter vivos trusts, and are created while you’re still alive. One of the more common uses of living trusts is to transfer ownership of your assets to loved ones. Living trusts bypass probate, where the court will settle the ownership of your assets after death. By avoiding the probate procedure, you save time and money.
Testamentary trusts are set up after death according to your last will and testament instructions. The advantage of this kind of trust is that it is very flexible. You can change the terms any time up until you pass away.
Both inter vivos and testamentary trusts can be revocable or irrevocable. Revocable trusts are created while you’re still alive. Because you are alive, you can change the terms of the trust as you age. The main purpose is to avoid probate and simplify the transfer of assets. Irrevocable trusts, meanwhile, are inalterable once created. The main reason to opt for this form of trust is to move assets out of your taxable estate. Once the assets are no longer a part of your estate, you are no longer taxed for them. They will also not be taxed to the estate after you pass.
Other Types
While these basic types of trust will handle many peoples’ needs, every estate is different. There are other forms of trust, such as charitable remainder trusts. These create a stream of income for beneficiaries during a specified period of time, after which the remaining assets are donated to charity. Other trusts include special needs trusts, spendthrift trusts, and Totten trusts. The latter is also known as payable on death accounts and are simple trusts that directly transfer assets to a beneficiary upon death.
As you might guess, trusts can be simple or complex, and you should know what you’re getting into. As with every part of the estate planning process, you should work with experienced attorneys. Like those at Dowd Law Firm, attorneys can help you determine if a trust is appropriate for your situation. While trusts can be useful, you should find out if they fit you well. Call us today and let us help you along this process.