What is a Trust?
A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. A living trust is a legal arrangement established during an individual’s lifetime that contains assets to be distributed after death and that bypasses probate. A trust can address specific tax concerns, provide creditor protection, ensure your wealth supports your family, or leave a legacy of charitable giving for a cause that you believe in.
What are the Most Common Types of Trusts?
There are many different types of trusts, but the three most common types of trusts are Revocable Living Trusts, Irrevocable Living Trusts, and Asset Protection Trusts.
Revocable Living Trust
A revocable living trust allows you to modify and even cancel your trust at your convenience while alive. You can add more assets or remove assets from the trust, change beneficiaries, change the guidelines of the trust, sell trust assets, and avoid probate. Upon death, the trust will become irrevocable. While this type of trust allows your beneficiaries to avoid probate, it does not offer as much tax protection as an irrevocable trust. But the convenience and flexibility of making changes as needs arise are what make this trust ideal for many families. It works well for those who want more flexibility and control over the distribution of assets.
Irrevocable Living Trust
An irrevocable living trust means that you cannot cancel or change it once it has been established. Those with an irrevocable trust you will need an agreement signed by the trustee and all beneficiaries. In essence, you need the permission of the beneficiaries to change any of the aspects listed above. Another option is to get an order from a judge. An irrevocable living trust is less common than a revocable one because it has more restrictions. So why would someone choose an irrevocable trust over a revocable one? Irrevocable trusts afford the grantor and their beneficiaries many more estate tax benefits than a revocable trust. For people with high net worth, this may be a more desirable option because it allows high-value assets to have estate tax exemption.
Asset Protection Trusts
The primary goal of an asset protection trust is to protect assets from potential creditors. In terms of preservation, asset protection trusts shield against creditors, lawsuits, and judgments against your estate. Asset protection trusts are self-settled, which means you can be a designated beneficiary and access your assets at any time. When structured properly, grantors should be able to successfully prevent creditors from going after assets.
Should I Set Up a Trust or Just Use a Will?
Wills are simple and relatively cheap. For small estates, a written will might be the best approach. Just keep in mind that all but the smallest estates will have to go through a probate process that will be a matter of public record and will require some time and expense to complete. If your goal is to avoid probate and protect the privacy of the trust owner and beneficiaries, minimize estate taxes, or protect assets from creditors then a trust might be your best option.
It is important to seek competent legal and financial advice when making this decision. The way you set up your estate can have drastic tax or legal consequences for you and/or your beneficiaries.
