The Big Three Types of Trusts
Leawood – 3 types of trusts. There are three major types of trusts. They are revocable trusts, which are also called Living Trusts. These is the main type of trust that most people think about. The second type is irrevocable trusts, which are trusts that cannot be amended. Finally, there are trusts created by a will, called a Testamentary Trust. See the article below for more.
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Understanding the 3 primary types of trusts
Whether you’re looking to avoid probate, limit possible estate taxes or assume greater control over how your estate is distributed after you pass, there a number of benefits that adding a trust to your estate plan can provide you and your loved ones.
Since there are a number of different types of trusts, one of the biggest challenges is knowing how each type differs, what goals a particular trust can help you accomplish and whether you even need a trust in your estate plan. To help you get started on understanding the options available, here’s an overview the three primary classes of trusts.
A revocable trust (also known as a living trust) is used to avoid having your estate subject to probate”the legal process of distributing your estate. Probate can be a lengthy, expensive and public process, making it a suboptimal route for your heirs when administering your estate.
Utilizing a revocable trust can be especially effective if you own property in multiple states. For instance, if you own a home here in Iowa and have a cabin in northern Minnesota, you may be subject to probate in both states when you pass. However, if those two properties are owned inside of a revocable trust, you’ll likely be able to avoid probate entirely, thus making the process of administering your estate quicker and less costly.
Contrary to revocable trusts, assets in an irrevocable trust can’t be removed or amended after they’ve been placed in the trust. Since you’ve relinquished control of assets placed in an irrevocable trust, they are effective removed from your estate, thereby protecting you from possible estate taxes.
There are many different types of irrevocable trusts. One common example, the irrevocable life insurance trust (ILIT) is a life insurance policy whose death benefits can be paid out to your heirs or help cover the costs of administering your estate without incurring any taxes.
Rather than creating and funding a trust immediately, it’s possible to create a trust that goes into effect upon your death. Known as a testamentary trust, this type of trust is created through a will and the terms of the trust are spelled out within the will. Testamentary trusts are often used as a tool that can help you create a trust for minor children. Even though assets in a testamentary trust may be subject to probate, the flexibility this type of trust offers when assigning a trustee may outweigh its costs.
Before going ahead and adding a trust to your estate plan, it’s important to remember that setting up a trust can be quite expensive. Talk with your financial advisor or an estate planning attorney to ensure a trust makes sense for you before adding one to your estate plan.
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