A trust can be a valuable piece of your estate plan. Setting up a trust can help you preserve your wealth for future generations, protect assets from creditors, reduce tax liability or allow you to leave your wealth to a charitable organization.
There are many different types of trusts to choose from. Before you set up a trust, it is important to learn about trust types and structures to decide which one is best for your situation.
Revocable and irrevocable trusts are two basic trust structures. A revocable trust, sometimes called a living trust, allows you to change the terms after it is created. An irrevocable trust does not provide you with this flexibility. Once an irrevocable trust is created, its terms cannot be modified.
Revocable trust
In many ways, a revocable trust operates the same as a will. You transfer assets into a revocable trust and they are distributed to beneficiaries after you pass away. Alternatively, you can choose to have your trust convert to an irrevocable trust after you pass away. This is called a testamentary trust.
A revocable trust allows you to avoid the New York probate process, which can be costly and lengthy. Additionally, probate litigation is sometimes public. Managing a revocable trust is generally private, which can make it an attractive option if privacy is a concern.
Although a trustee manages a revocable trust, you remain the owner of the assets. However, this means that you must report any investment returns from the trust and pay taxes on the trust.
Irrevocable trust
An irrevocable trust can potentially offer you greater protection from creditors and estate taxes. Since you cannot modify the terms of the trust once it is created, the assets move out of your estate. The trust itself pays taxes and files tax returns.
There are various types of irrevocable trusts to choose from. Some common irrevocable trusts include a grantor retained annuity trust, an irrevocable life insurance trust and a special needs trust.
A grantor retained annuity trust allows you to minimize taxes on assets given to your beneficiaries. You place assets in the trusts and receive an annuity payment on the assets. When the trust terms end, any appreciation in value passes to your beneficiaries without being subject to a gift tax.
An irrevocable life trust can be a good option if you own a family business. This type of trust allows you to gift the premium on a life insurance policy into the trust. When you pass away, the trustee collects these proceeds and distributes them to the trust’s beneficiaries, who can use them to pay estate taxes, preventing them from having to sell the family business.
Special needs trust
A special needs trust can be created if you have a family member with a disability. If you provide financial assistance to a special needs child or family member outside of a trust, this can disqualify them from receiving Supplemental Security Income (SSI).
Placing the money in a special needs trust allows them to qualify for SSI benefits and receive the funds from the trust.
Other types of trusts can allow you to give to charitable causes, transfer real estate or shield assets from creditors.
These are examples of just a few types of available trusts. Once you determine your goal for your assets, you can analyze which type of trust works for you.
