Estate planning is the process of making preparations for how a person wants their assets to be handled in the event of their incapacitation or death. There are several important elements to creating a strong estate plan. However, one of the most influential tasks is choosing which type of trust is going to be in the best interest of your legacy and loved ones. Many people consult with an estate planning professional for advice, as to tackle this task alone can be both intimidating and confusing.
For the future of your legacy, it is crucial that you choose the right type of trust. Here are five most commonly used types of trust options for those creating an estate plan:
#1 Living Trust
Otherwise referred to as an “inter-vivos” trust, a living trust is created by the grantor and remains in control of his or her assets throughout life. This type of living trust permits the grantor to make changes as he or she wishes, as life circumstances change. The most frequent reasons that people consult with their estate planning professional about updating a living trust, is in the event of divorce, marriage, adoption, birth, death in the family, or major change in financial status.
#2 Revocable Trust
A revocable trust can be updated or terminated throughout the grantor’s lifetime. In many cases, an estate planning professional helps their client set up the document in such a way that assets are automatically transferred and avoids going through probate entirely. After passing on, whoever is assigned as the successor trustee or beneficiary is to receive the assets right away.
#3 Irrevocable Trust
With an irrevocable trust, the grantor is not permitted to update or alter the document at any point during his or her life. The potential benefit to an irrevocable trust is that while the grantor is not longer managing the assets, this type of trust is usually more tax efficient (with low estate taxes, if any are required at all). Many people may prefer an irrevocable trust because the assets are transferred out of the grantor’s name and directly into the next family generation.
#4 Testamentary Trust
A testamentary trust may also be called a “will trust”, which is an agreement for a beneficiary’s benefit after the grantor has passed. This type of trust details how such assets are to be passed on after the grantor’s death, and is frequently instituted by an executor (who manages the trust for the grantor’s descendants after the will has been established). A testamentary trust is irrevocable, which means it cannot be altered after finalization.
#5 Funded (Or Unfunded) Trust
Unfunded or funded trusts are agreements that either have assets put into them, or are there to accepting funding at any time. These trusts can be used throughout the grantor’s life or after death. While this may sound simple, it is important to meet with an experienced estate planning professional about whether these trusts are most suitable to your situation.