Trusts are an essential estate planning tool that can provide countless benefits. Before creating and implementing a trust as part of your estate plan, it is crucial to explore the different types of trusts to find out which option best fits your unique needs.
Revocable Living Trusts
Living trusts come in a couple of different forms, revocable and irrevocable. The main difference between the two is that revocable trusts can be altered while irrevocable trusts cannot be changed.
People who create a living trust, also known as a grantor or settlor, can decide who receives certain assets and direct how their property is divided. Additionally, living trusts allow families to bypass the costly and time-consuming probate process.
During the creation of the trust, the settlor will select a trustee who will oversee the trust if the grantor becomes incapacitated. Settlors can name themselves the trustee if they desire, but they must also assign a secondary trustee. Once the settlor has passed away, the terms of the trust and any assets placed into it cannot be changed or removed. One downside of a revocable trust is that the settlor will still be responsible for any taxes owed on the assets included in the trust.
Irrevocable Living Trusts
Irrevocable living trusts are similar to revocable living trusts, except that the terms cannot be changed. After creating an irrevocable trust, the settlor loses control over any assets or property placed into the trust. Additionally, the settlor is not able to name themselves as the trustee.
One of the most important benefits of an irrevocable trust is that the assets are protected from creditors and potential lawsuits. Furthermore, because the trust maintains ownership of the property placed inside of it, the settlor will not be liable for the taxes owed.
Special Needs Trusts
A special needs trust is comparable to a living trust, except that it is designed for individuals with mental or physical disabilities. Special needs trusts are designed to help beneficiaries stay eligible for certain benefits, especially Medicaid and Supplemental Security Income. This type of trust protects their eligibility because the beneficiary does not legally own the property in the trust. This helps the beneficiary stay under the asset-or-income limit that most government programs have.
Testamentary trusts differ from other types in that they are not established until the settlor has passed. The trust’s creator will generally include directions in their will describing how they want the executor to manage their assets. Once created, the trustee will assume control and distribute property based on the terms of the trust. However, the main disadvantage of creating a testamentary trust is that it must pass through probate. This can be seen as a negative to some families as all assets that go through probate will become part of the public record.
Considering the benefits of a trust
Establishing a trust can help people protect their property, family, and legacy. However, each trust has its own specific advantages and disadvantages. If you have any questions about which type of trust is suitable for you and your family, speaking with a dedicated estate planning attorney may be helpful.