Trusts are legal arrangements that ensure the administration of a deceased person's assets align with what they would have wanted. Additionally, trusts work on behalf of your beneficiaries in your absence.
Not all trusts are the same, however. The four main types of trusts are living trusts, testamentary trusts, revocable trusts and irrevocable trusts.
Living trusts are created while you are alive. Alternatively, testamentary trusts are set up after death in accordance with the contents of your will. Similarly, you can make alterations to revocable trusts while you're living, but irrevocable trusts cannot be amended or revoked after they are established.
The many different types of trusts
There are many types of trusts, all of which serve their own individual purposes. Let's take a close look at eleven different trust types.
Charitable trusts are irrevocable. They are designed to simultaneously benefit you, your beneficiaries and a qualified charity under IRS rules. The two primary types of charitable trusts are charitable lead trusts and charitable remainder trusts.
A charitable lead trust is designed to support one or more charities for a specified period. After that, the trust reverts to other beneficiaries. On the other hand, a charitable remainder trust provides you with an income stream. From there, it reverts to the named charity after you die.
Qualified terminable interest property trusts
QTIP trusts are set up to provide income for your surviving spouse. QTIP trusts are most useful when beneficiaries exist from a previous marriage and you die before your subsequent spouse.
Grantor-retained annuity trusts
Grantor-retained annuity trusts are irrevocable. They are set up for a specific period to minimize taxes on large financial gifts that are destined to go to family members or other beneficiaries.
You’ll pay taxes on the assets when you establish the trust. Then, you’ll receive an annual payment for the entire term of the trust. After that, your beneficiaries will receive the remaining assets.
Irrevocable life insurance trusts
Irrevocable life insurance trusts can be used to exclude life insurance proceeds from your taxable estate. You can also make use of this type of trust when you want to transfer the death benefit immediately to one or all of your beneficiaries.
Irrevocable funeral trusts
Irrevocable funeral trusts are ideal when your priority is to put aside money to cover your own burial and funeral costs. However, state laws vary in regard to irrevocable funeral trusts, so make sure you consult with an attorney about your options when it comes to this type of trust.
Spendthrift trusts protect inherited assets from the potential financial responsibility of your beneficiaries.
Special needs trusts
Special needs trusts allow you to direct how assets can be used for beneficiaries who have special needs. This is helpful in instances where the person with special needs may not be able to provide for themselves or manage the financial requirements of an inheritance.
Generation-skipping trusts will skip your children and become applicable for the next generation instead. This is a beneficial way of ensuring that your assets go directly to your grandchildren and their financial well-being.
Totten trusts are a simple type of trust. They essentially allow you to set up a bank account for your beneficiaries. You can add to or withdraw from the bank account throughout your lifetime. Whatever remains in the account at the time of your death becomes that of your beneficiaries.
Asset protect trusts
Asset protect trusts are the most ironclad option. They are incredible tools when you want to protect your assets from creditors. Just keep in mind that they can be very expensive to establish.
Blind trusts are a good choice if you anticipate there being any conflicts of interest among your family members after you die. With a blind trust, your beneficiaries will have no prior information about any assets that you have placed within the trust. The only person who has full discretion over the assets and the distribution of such will be the appointed trustee.
At their core, all types of trusts serve the purpose of ensuring that your assets will be smoothly passed along to the beneficiaries of your choosing. They can help you navigate specific tax concerns or creditor protection while ensuring that your wealth assists the ones you love in your absence.
Trusts can even help you leave a legacy for a charitable cause that you believe in and want to support. No matter what your wishes are, there's a trust out there that can meet your expectations and serve you well.
Your legal advisers can help you narrow down your options and pinpoint the trust type that makes the most sense for you. When you know what you want from your trust and how you want it to affect those who survive you, contact a tax professional.
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