When drafting an estate plan, many people consider placing assets or cash within a trust. Trusts survive a person’s death and often pay out to a beneficiary at a time designated by the trust.
Depending on their goals, people can choose from many kinds of trusts. What are the differences and how do they work?
Revocable and irrevocable trusts
Individuals create and maintain revocable (living) trusts in their lifetime. The trustee may alter the terms and even remove assets. Assets in revocable trusts at the time of the trustee’s death are not subject to probate. Creditors may still sue for the assets within a revocable trust, however. When the trustee dies, revocable trusts may become irrevocable.
Irrevocable trusts cannot be changed or modified in any way. These trusts must mature per the agreed-upon terms, paying out to the designated beneficiaries.
Asset protection trusts
Asset protection trusts preserve a protects a person’s estate from creditors. Many people set these trusts up in foreign countries to ensure protection. Most people design these as limited-time irrevocable trusts before releasing the assets back to the trustee once the creditor threat has passed.
Assets placed into charitable trusts pay out to a charity or the public. Many people use these trusts to reduce the value of their estate and lower estate or gift taxes. Those who set up a charitable remainder trust, regularly funding a charitable organization, can enjoy a lifetime of benefits of altruistic service.
Tax bypass trust
These unique trusts serve families. The trustee will set aside assets in a bypass trust to pass to their spouse upon death. When the spouse passes away, assets in a tax bypass trust pass to the children, but at a significantly reduced estate tax rate. Normally, heirs might sacrifice up to 55% of an estate to taxes. A tax bypass trust can save hundreds of thousands of dollars in estate taxes.
Bring questions to an attorney
People looking for more trust options can reach out to a local lawyer familiar with estate planning and trusts. An attorney can explain these trusts in detail, work with financial institutions and draft legal documents that help families preserve their legacy.