When planning estates, trusts can be set up for the easy transfer of assets to heirs (usually family members). With the right kind of trust fund set up, assets and property passed from the original owner to the inheritor can avoid Probate and more importantly — taxes. Although there are various different kinds of Trusts, here are three main types, which are based on who owns the assets and when it goes into effect.
Living Trusts
A living trust or a revocable trust is one that is made by the grantor (the trustor) during his or her lifetime, with their assets or property intended for his or her use during their existing lifetime. This type of a trust allows the grantor to benefit from the trust while he or she is still alive, but later passes the assets and property on (using a trustee) to a beneficiary (the recipient) upon their death. The benefit of a living trust is that you are generally able to avoid probate court - but it does not provide protection from claims made by creditors. Any revenue generated by revocable trust must be reported on the grantor's personal taxes. A living trust can be made revocable or irrevocable based on its specifications.
Testamentary Trusts
A testamentary trust is set up through a provision in the grantor’s last will and testament. Made for the beneficiary once the grantor has died, a testamentary trust details how the assets or property must be transferred after the grantor’s passing. An executor is appointed for testamentary trusts, to manage the trust for the grantor's future beneficiaries. A testamentary trust allows the grantor to set conditions, for example, a beneficiary child can access to funds for education only when they turn 18.
Irrevocable Trusts
A irrevocable trust is one that a grantor cannot change or alter during his or her lifetime or even after the grantor has died. The reason being, such a trust contains assets or property that cannot be moved back into the possession of the grantor. Irrevocable trusts often invite little to no estate taxes. No federal estate taxes (up to $11.7 million) in a Irrevocable Life Insurance Trust. This makes it a popular choice for transferring assets completely out of the grantor's name and into the beneficiary's name.
There are still many more types of trusts. Such as: Special needs trust, QTIP trust, Blind trust, Charitable trust, Spendthrift trust, Asset protection trust, Totten trust, Constructive trust, By-pass trust, Generation-skipping trust, and Credit shelter trust. Each type of trust serves a specific purpose for both the grantor and the benefactors. The type of trust you opt to enact has its own conditions and taxation terms. So pick the right one wisely, and it helps to get legal help when setting a trust.
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