You’ve probably heard of a “trust fund baby,” but you may not fully know what a trust is. It’s not only the incredibly wealthy that use trusts. Legally, a trust is an arrangement in which a third party holds financial assets for the benefit of the beneficiary. Assets in the trust are subject to specific terms that you set up. This can help your heirs avoid estate taxes and protect those assets for future generations. Learn more about trusts and when they’re appropriate by continuing to read this article.
Types of Trusts
There are many categories of trusts, marital, bypass, testamentary, and charitable lead trusts to name a few. It depends on who benefits from the trust. You put the assets you want in a trust and determine how distributions are made. You set up the terms of how those assets are distributed after your death, much like a will. The biggest distinction in trusts isn’t necessarily the types but whether the trust is irrevocable or revocable.
A revocable trust is also called a living trust. You control the assets while you’re living. You can even dissolve the trust while you’re alive if your circumstances change. Upon your death, the assets pass to the beneficiaries outside of probate. You make provisions for who will manage the trust after you pass away or become incapacitated. A revocable trust may be subject to estate taxes, but it depends on the amount and who inherits the belongings.
An irrevocable trust operates much the same way, except that once it is set up, you can’t make changes to it. One of the benefits is that an irrevocable trust reduces the amount of inheritance subject to estate taxes. If you are ever sued, the assets in the trust are generally protected against legal judgments. However, you do lose control of the assets with this kind of trust.
Do You Need a Trust or a Will?
A trust is not a will, but it is part of estate planning. A trust lets you put additional control in place to protect assets. This can be helpful if you have young children or beneficiaries who aren’t financially wise. When the trust is set up, you determine how and when the assets are distributed.
A will is less expensive to draft than a trust, but it doesn’t provide the same level of specificity. You should discuss your situation with an estate planning attorney to talk through the benefits of a will versus a trust to decide what makes sense for your situation. The laws of your state can also determine whether a will or trust is better for you. Make an appointment today with an estate planning attorney, like an estate planning attorney, who can help you find the best path to move forward.