What is a trust?
Trusts are a valuable tool in estate planning that have the potential to give you more control over how your hard-earned assets are passed on to the next generation. While trusts may require more effort to setup than a will, trusts may give you several additional benefits and choices that you don't get with other estate planning tools.
Most people are familiar with a will. A will is a document that explains how wealth is passed on in the event of someone's death. A trust can facilitate the same transfer of wealth, but there are some important differences that may make a trust the better choice for families looking to maintain control and privacy when dealing with an often difficult situation.
A trust allows the family to avoid the probate process. Probate is the legal process of discharging an estate and requires the approval of a judge. Because it goes through the legal system, some records may be public. A trust keeps the estate proceedings private.
Trusts may also provide tax benefits or give the trust creator more control over how assets are handed over. They typically require more time and money to create than a will, but for many families they are well worth the additional effort.
Types of trusts
There are many types of trusts that can fill specific needs like charitable donations, tax planning or passing a business to heirs. The following are the most common types of trusts.
Revocable trust — A revocable trust, sometimes called a revocable living trust, is a trust that the trustee maintains control of and can change, or revoke. These trusts provide more privacy and even some asset protections over a will with maximum flexibility to change in the future.
Irrevocable trust — An irrevocable trust locks away assets in the trust and doesn't allow for future changes. While you give up flexibility with an irrevocable trust, it can provide stronger tax and asset protections than a revocable trust. Someone who is concerned with minimizing estate taxes may consider this trust. The trustee retains control once this trust is established.
Charitable trust — Charitable trusts are ideal for giving a portion of your estate to a charitable cause as part of your estate plan.
Generation skipping trust — If you want to pass on wealth to grandchildren or beyond, a generation skipping trust can be customized for your needs.
Life insurance trust — With this type of trust, the insurance trust owns your life insurance policy. Naming your trust as the beneficiary of your life insurance policy can give you more control over how the proceeds are distributed.
Specialty trusts — Depending on your current financial position, you may want to minimize taxes when passing assets to a spouse or children. There are trusts for that. You can even customize some trusts to help your heirs avoid squandering their inheritance too quickly, or provide a source of income.
A trust may be an option to consider for your estate planning needs. Depending on your finances, a trust could lead to savings while adding privacy and more control over your estate.
Now that you have reviewed basic information about common types of trusts, learn more about other important aspects of estate planning.