A trust is a way that people can transfer assets to others without having to go through the probate process. There are many different types, each of which serves a specific purpose. You have to think about what needs to go to whom and determine how they might be affected by the inheritance. In some cases, such as when a person receives needs-based services like Medicaid, a special needs trust is necessary.
If you are considering adding trusts to your estate plan, you need to understand some aspects of the process. This information will help you choose an appropriate trust for the goals of your estate.
Basic classifications of trusts
There are some basic classifications of trusts that can apply to more than one trust. When you are reviewing trusts, it might help you to know what these terms mean.
Funded versus unfunded trust: A funded trust is one that has assets in it, whether this comes from transfers into the trust during the trustor's lifetime or after their death. An unfunded trust is simply one that doesn't have assets in it at the current time.
Revocable versus irrevocable: A revocable trust is one that can be changed or terminated by the trustor. An irrevocable trust can't be terminated or changed by the person who created it. Some trusts are revocable while the creator is alive, but transition to irrevocable when the person passes away.
Testamentary versus living: A testamentary trust is established through the will after the creator passes away. This type of trust has specific goals, including gifting to charities, protecting the surviving spouse, skipping over the spouse as a beneficiary or handing assets over to a child from a previous marriage. A living trust is created by the trustor while they are still living. A trustee is placed over the trust to ensure the terms are complied with.
Benefits of trusts
Each type of trust has different benefits for the trustor and the beneficiaries. Many trusts help to transfer assets without having serious tax implications for the beneficiary. Understanding how to handle taxes in these cases is critical. Some trusts, such as irrevocable trusts, help to ensure that creditors can't come after the beneficiaries for assets that are held in the trust if the trustor has outstanding balances with them after the person passes away.