With all of the options out there, it can be hard to choose which trust is best for you.
Trust Point is here to help. We’ve put together this glossary to define some of the most common types of trusts and why they’re used. Continue reading to learn more about which trust is best for you.
What is a Trust?
A trust is a legal agreement involving three parties that helps ensure your wishes are met for your assets after your lifetime. In a trust agreement, the grantor/settler creates the trust, who gives a third party, called a trustee, the ability to manage the trust property and specify how ones assets will be distributed to benefit a third party (the beneficiary).
How is a Trust Different from a Will?
Which Trust Is Best For You: Top 4
1. Revocable Trusts
One of the two main types of trust is a revocable trust. These types of trust allow the creator to maintain control of all assets within the trust. Once it’s established, the revocable trust creator can amend or revoke it at any time they wish.
Commonly referred to as living trusts, revocable trusts offer an effective estate-planning tool to lower the costs and hassles of probate, preserving privacy and preparing your estate for ease of transition in the event of death or incapacity. Unlike in a will, assets in a living trust will generally pass to heirs sooner, giving your family better financial protection in case the worst happens.
2. Irrevocable Trusts
The other main type of trust is a irrevocable trust. This type of trust, unlike a revocable trust, cannot be amended or revoked and once a person places assets into it, they no longer belong to them.
Using an irrevocable trust allows you to minimize estate tax, protect assets from creditors and provide for family members who are under 18 years old, financially dependent, or who may have special needs.
3. Credit Shelter Trusts
Another common trust is called a credit shelter trust, which is also referred to as a bypass or family trust. This type of trust is used for the purpose of transferring assets to lower estate taxes. As the trust is being developed, the creator will put a provision in their will that leaves assets up to the estate tax exemption to the trust. The biggest benefit to a credit shelter trust is that as money grows, it’s never subject to estate tax.
A credit-shelter trust offers a way for you to pass on your estate and lower estate taxes. Under a credit-shelter trust, your surviving heirs would not receive your property (which would then be subject to an estate tax). Instead, your heirs would receive an interest in the trust itself.
4. Irrevocable Life Insurance Trust
The final common trust is referred to as an irrevocable life insurance trust or ILIT. Its intended purpose is to remove the value of your life insurance policy from your taxable estate. The biggest benefit to an ILIT is that assets can be transferred to beneficiaries immediately in order to pay for any estate costs. However, there is one drawback — once you’ve transferred your life insurance policy into an ILIT, you can’t change your named beneficiary or borrow against the policy.
The three main reasons why you’d want to utilize an irrevocable life insurance trust include estate tax concerns, large sums of money left to minors or irresponsible adults, and asset protection.
Other Types of Trusts
Although the four types of trusts above are common options, there are also several other options to consider.
- Joint Trusts
- A-B Trusts
- Qualified Terminable Interest Property (QTIP) Trusts
- Testamentary Trusts
- Charitable Trusts
- Special Needs Trusts
- Asset Protection Trusts
- Blind Trusts
View our blog “4 Common Types of Trusts Compared (Pros & Cons)” for pros and cons of each of these trusts.
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