There are many things to know about trusts. It is an agreement established to ensure your assets go to the beneficiary you have identified. A third party will then execute the terms of the agreement for the creator and beneficiary. The trust will help take care of your beneficiaries when you are no longer able.
There are many benefits to establishing a trust including the below.
- There may be tax benefits from having a trust.
- The creator can customize their estate plan.
- Certain types of trusts can help during disability or illness.
- Some trusts are flexible and can be changed or amended.
- You can avoid the probate process with a trust.
There are two main types of trusts. As the name indicates, you can amend a revocable trust. Alternatively, you cannot do the same for an irrevocable trust. Below are some details about each.
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Revocable Trust
A revocable trust sometimes called a living trust, acts similar to a will. By creating a revocable trust you can avoid the public and lengthy probate process. With a revocable trust, you are still considered the owner of your assets. Your assets are taxed and not protected from creditors or lawsuits. They can be distributed upon your death all at one time. Alternatively, you can set this up to create an irrevocable trust that will continue for the beneficiary.
Irrevocable Trust
Unlike revocable trusts, irrevocable trusts typically cannot be changed. Because the assets are no longer in the estate, it files its own tax returns and pays taxes. One benefit of this is more protection for the creator and estate taxes. Additionally, these can be set up with arrangements to create irrevocable trusts upon your death. There are multiple types of irrevocable trusts. Some examples are listed below.
- A domestic asset protection trust protects your assets from creditors. This is set up for children to keep in the family in the event of a divorce.
- Special needs trusts are for a child or family member with a disability. The family member is typically qualified for government benefits and can also receive assets from the special needs trust. When money is gifted to a disabled family member rather than having special needs trust, it could prohibit them from receiving social security income.
- Charitable remainder annuity trusts are for a primary beneficiary, but the remaining assets are set aside for a charity of your choice. On the other hand, this type of trust can apply assets to the charity of choice while the remaining assets go to your chosen beneficiary. You may be able to take a tax deduction in advance because this is a trust for a charitable donation.
There is a lot to know about trusts. They are a part of estate planning and can provide peace of mind knowing that your loved ones are cared for when you are no longer able to. Because they can be complex and overwhelming, it is best to contact a financial advisor to help determine what is best for your circumstance.