Wondering what trust is right for you? Compare the various types of trusts in this detailed guide.
When organizing your estate plan, many consider creating a trust. A trust is a common alternative or companion to a will and involves giving another party authority to handle your assets for your beneficiaries. Many choose to opt into creating a trust instead of a will to avoid probate expenses and maintain better privacy in the event of their death.
If you’ve ever considered setting up a trust for your estate plan, you may know that there are a wide variety of trusts out there with different stipulations and purposes. Here are four of the most common trusts and why they’re used, plus some other trust options that might work for you.
Four Common Types Of Trusts
There are two main types of trusts: revocable and irrevocable.
A Revocable Trust
Also known as a living trust, allows the creator to maintain control of all assets within the trust.
- Only you can amend or revoke the trust.
- Lowers the costs and hassle of probate, making preparing your estate easier.
- This trust may pass to your heirs sooner, giving your family better financial protection.
- Your beneficiaries have less control over what they would inherit.
An Irrevocable Trust
Unlike a revocable trust, an irrevocable trust cannot be amended or revoked.
- Minimizes estate tax.
- Protects assets from creditors.
- Provides for family members who are under 18 years old, financially dependent or may have special needs.
- When assets are placed into the trust, they are no longer yours.
Credit Shelter Trusts
Also known as bypass or family trusts, are used to transfer assets to lower estate taxes.
- Assets will not be subject to estate tax.
- Your heirs receive an interest in the trust itself.
- Your heirs do not receive your property.
- Requires a separate tax return.
Irrevocable Life Insurance Trusts
Irrevocable Life Insurance Trusts are meant to remove the value of your life insurance policy from your taxable estate.
- The assets can be transferred to beneficiaries immediately to pay estate costs.
- This can eliminate estate tax concerns, avoid large sums of money left to minors or irresponsible adults, and provide additional protection to your assets.
- Once you’ve transferred your life insurance policy into the trust, you can’t change your named beneficiary or borrow against the policy.
Other Trust Options
We’ve put together a glossary of a variety of additional trusts so you can weigh the pros and cons of each and decide if any of these may work for you.
Joint Trusts involve the assets of two individuals.
- Both individuals would be able to jointly pass on their assets to any beneficiaries.
- Both members of the trust retain control over their assets.
- If one member dies, the surviving member automatically becomes the trustee.
- Separate trusts may allow for better protection from creditors.
- Federal death tax may need to be paid.
A-b Trusts are another type of joint trust, which separates the two individuals’ assets into two trusts, A and B.
- You can avoid double taxation on both trusts A and B.
- Allows for more control if one individual dies, so the other cannot change your beneficiaries.
- Not as useful as before due to lifetime federal gift tax and estate tax exemption of $12.92 million for 2023.
- This type of trust is irrevocable and cannot be changed.
Qualified Terminable Interest Property (QTIP) Trusts
QTIP Trusts allows an individual to provide for a surviving spouse and determines exactly how the trust’s assets will be distributed in the event that the surviving spouse dies.
- Allows for more control before and after the death of the surviving spouse.
- May ensure the surviving spouse is always taken care of financially.
- This type of trust is always irrevocable.
Also called will trusts, are created inside a will and will not take effect prior to your passing.
- Your will outlines how the trust should be created and allows for more control.
- Again, this trust cannot take effect until after you die.
- This type of trust does go through probate court.
Benefit a charitable organization and your beneficiaries. There are two main types of charitable trusts: charitable lead trusts (CLTs) and charitable remainder trusts (CRTs).
- You can choose what amount of assets will go to a charity and what amount of remaining assets may go to other beneficiaries.
- Not suitable for small charitable contributions.
Special Needs Trusts
Special needs trusts allow you to leave assets to a loved one with special needs while maintaining their eligibility for certain government benefits.
- Allows for additional financial support for the individual.
- Control over how the assets will be used for the individual’s expenses.
- The trust can be customized to provide for the individual’s specific needs.
- Requires a corporate trustee who has knowledge of public benefits programs and how trust distributions may affect eligibility.
- Incorrect administration may cause the loss of benefits.
Asset Protection Trusts
Are often to protect your assets from creditors.
- Your estate will be most protected with either this type of trust or an irrevocable trust.
- Includes additional tax savings.
- May be expensive to establish.
- Is a more complex type of trust.
Also a type of living trust, do not provide beneficiaries with any prior information or knowledge of the assets in the trust.
- Avoids potential conflict of interests.
- Your appointed trustee will have full discretion over the assets.
- You cannot personally manage the assets in the trust.
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