There are different types of trusts that you can set up to help you and your family maximize your estate.
Choosing the right trust for your finances can help you and your family:
- Gain tax advantages
- Bypass the probate process
- Help protect assets from creditors
- Control assets
What Is a Trust?
A trust is an estate planning tool often used to bypass the probate process and transfer assets to beneficiaries. It is a legal document that allows a third party (known as a trustee, such as a firm or individual chosen by the trustor) to hold assets on behalf of a beneficiary or beneficiaries. The trustor, settlor, or grantor is the person who sets up the trust and administers property or assets to the beneficiaries.
Different Types of Trusts
There are many different types of trusts. And within them, many arrangements can be made. The type of trust recommended depends on what the trustor would like to do with the assets and the financial priorities of the trustor and/or benefactor.
There are 4 main types of trusts:
- Living Trust
This type of trust is created while you are still alive. It is also known as an inter vivos trust. A living trust avoids probate – the court process for distributing assets after death. Since assets won’t have to undergo the probate process, this can save on time and court fees, as well as potentially reducing estate taxes for beneficiaries.
- Testamentary Trust
A testamentary trust is set up according to the last will and testament after a person’s death. This trust can be more flexible than a living trust because the terms set out in the will can be changed at any time up until the death of the trustor.
- Revocable Trust
Since a revocable trust is created while a grantor is living, it is considered a living trust. As the name implies, the terms of a revocable trust can be changed during a grantor’s lifetime. This type of trust can also be used to bypass the probate process after the grantor’s death.
- Irrevocable Trust
When it comes to an irrevocable trust, the trustor is referred to as the benefactor. The terms of this type of trust cannot be changed after it is created. An irrevocable trust is primarily used to transfer assets out of the benefactor’s taxable estate. During the benefactor’s lifetime, income from the assets is no longer taxable to the benefactor. And upon their death, the assets are not taxable to the estate.
Each type of trust has different varieties and options, with advantages and disadvantages, based on your needs and finances. It is recommended that you speak to an experienced attorney about which type of trust and option is best for you and your family.
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