Depending on your goals, trusts may serve as an important tool in your estate plan. However, you must understand the different types of trusts and the benefits of each.
Start your research by exploring the primary types of trusts used in estate planning.
An individual can create a revocable trust during his or her lifetime and change the terms of the trust at any time. You can avoid probate by transferring assets to the trust, also known as a living trust. However, creditors can access assets held by a living trust.
With fixed revocable trusts, the trustee distributes assets on a certain date and in a certain amount based on the trust documents. It can also be discretionary, which means the trustee has the power to distribute assets as he or she sees fit.
With this type of trust, you are unable to make changes after the initial creation. Once you transfer assets to this type of trust, they remain in perpetuity. Although an irrevocable trust lacks the flexibility of a revocable trust, it shields your assets from creditors and may limit estate and gift tax. Irrevocable trusts can be either fixed or discretionary trusts.
Other types of trusts you may consider as part of your estate plan include:
- Marital trust: Your surviving spouse inherits assets without paying estate tax; however, heirs will be subject to this tax if they inherit the remaining proceeds.
- Bypass trust: Ownership of the trust transfers to your spouse after your death; this allows your future heirs to avoid estate tax while giving your spouse access to the assets.
- Insurance trusts: Your life insurance proceeds combine with the trusts; this protects the insurance payout from taxation.
Although complicated, trusts can be valuable tools in estate planning. Consider your ultimate goals when choosing the right structure for your needs.