Trusts are among the most powerful tools in estate planning, but they can be confusing. If you are not familiar with the legal terms and concepts involved, you may not know where to begin when you are deciding what type of trust, if any, you want in your estate plan.
In this blog post, we will try to help you narrow down your choices. First, we will define a trust. Then, we will describe two categories of trusts: revocable and irrevocable trusts.
What is a trust?
A trust is a legal tool to manage property for someone’s benefit.
There are three parties to a trust: settlor, trustee, and beneficiary. When you use your assets to create a trust, you are the settlor. As settlor, you give up your full ownership rights to the property and put the property in the hands of a trustee. This trustee holds and manages the property for the benefit of the people or entities you have named as beneficiaries. When you create a trust, you can name yourself as the primary beneficiary during your lifetime. You can name your loved ones as successor beneficiaries so that, after your death, the trust benefits them.
You as settlor have broad discretion in deciding the terms of the trust. You determine what rights your beneficiaries have to receive income or principal from the trust assets. You also decide the purpose of the trust, such as to support the health, education, and lifestyle of the beneficiaries. You can also determine the length of time that the trust will support your beneficiaries; for example, you can provide that the trust will terminate when your beneficiaries reach a specific age.
Revocable and Irrevocable Trusts
When creating a trust, you must decide whether your trust will be revocable or irrevocable.
A revocable trust is the most common type of trust. The main advantage of a revocable trust is that it gives you control over the assets and terms of the trust. If you want to change your beneficiaries, alter the terms of the trust, or dissolve the trust altogether, you will likely create a revocable trust. A revocable trust’s flexibility makes it a good option for most people who want to create a trust.
An irrevocable trust can provide greater protection to your assets. When you create an irrevocable trust, you move the assets out of your estate. For details on the implications of taxation of irrevocable trusts, consult your CPA or estate lawyer.
When you are working with an estate planning attorney to create a trust, ask yourself what is more important to you: flexibility or protection. If flexibility is more important, consider a revocable trust. If asset protection is more important, consider an irrevocable trust.