A trust is an estate planning document that illustrates what assets go to your heirs after death. Once you establish a trust, you can appoint a trustee to manage your account and make decisions for the trust. A trustee can be an individual or an institution, such as a law firm.
There are a few different types of trusts that your family can create. Some trusts only go into effect after you die and others can be effective immediately. The typical purpose of a trust is to transfer your assets to your beneficiaries easily and to avoid the probate period after death. There can also be tax benefits associated with creating a trust.
There are more specific trusts for certain scenarios such as a charitable trust or life insurance trust. For this article we are going to stick with an explanation of the two most common trusts.
The two most common types of trusts are “revocable and irrevocable” trusts. These are both classified as living trusts, thus they are created when you are alive. These two trust types differ in the amount of control you have over your belongings and your designated beneficiaries. Tax advantages differ between these two trusts as well. Let’s dive into the differences.
A revocable trust can be changed or terminated by the creator (you) at any time. Generally, if you are the grantor, you will act as the trustee of your own revocable trust. Assets within a revocable trust are owned by you and any monetary gains need to be reported on your personal taxes. After you die, a revocable trust ends and becomes an irrevocable trust.
An irrevocable trust cannot be changed by you without the permission of the beneficiaries. When you create an irrevocable trust you are giving up your control of your assets and therefore, those assets are moved out of your estate. This type of trust seems to be very restrictive and may not appear to be as beneficial at first glance. However, if you have a complex estate and want asset security or certain tax advantages an irrevocable trust might be right for you.
Which Trust is Right For You?
Everyone’s situation and estate is different. For some people a will is enough to handle their estate after they die. With a bit of complexity in your estate, a trust can be more specific on what to do with your assets and can avoid probate after death. Trusts can also prohibit creditors from getting to your assets and reduce tax implications.
The price to set up a trust is going to vary by the complexity of your estate. Consult with your lawyer to see which trust is right for you or if a will is enough for your scenario. Regardless of pricing it’s a small price to pay to help your loved ones if something unexpected happens. Within Addio, you can easily save your trust and add all of your important details so your trustee and beneficiaries will know what to do if the unexpected happens.