When you visit an estate planning expert, they might start a discussion about trusts with you. Anyone can have a trust, and they are created to be their own legal entities designed to protect your assets. There is more than one type of trust, and it helps to know the different types of trusts before you start your discussions.
A revocable trust (also called a living trust) is one that can be altered, expanded, or changed by the owner during their lifetime. The owner can transfer title to all of their properties to the trust, and put their assets in the trust for distribution at some point in the future.
While this trust is its own entity, it cannot hide assets from creditors at any point in time. While this trust can help a family to avoid the hassles of probate after the owner’s death, the assets in the trust will still be exposed to creditors and could be subject to collections.
An irrevocable trust cannot be altered in any way once it is completed, even by the owner. When assets are transferred to the trust, they are a permanent part of the trust until such time as they are distributed. The assets in an irrevocable trust are normally distributed after the death of the owner and without need for probate.
Asset Protection Trust
An asset protection trust is a complicated device used to protect assets from creditors. It is an irrevocable trust, but it also has an expiration date where the assets are returned to the owner, or distributed to beneficiaries if the owner has passed on. In many cases, these types of trusts are held in foreign banks for legal and tax reasons.
A charitable trust is established to distribute funds to charitable organizations upon the death of the owner without worrying about gift taxes or any applicable estate taxes. While the owner is alive, a charitable trust can be used to protect assets from certain types of tax implications and lower the owner’s taxable income.
Sometimes a parent wants to provide for their child after the parent has passed on, but they know that the child would squander the money if left to their own devices. A spendthrift trust allows distribution to a beneficiary, but only under strict guidelines established by the trust owner. The guidelines can involve the beneficiary needing to be a certain age to get the benefits, or the beneficiary getting benefits distribution based on a set schedule.
Taxation By-Pass Trust
Under the current laws, spouses can leave each other a specified amount of money before estate taxes kick in. A taxation by-pass trust allows one spouse with significant means to leave their other spouse an inheritance beyond the established estate tax limit at a greatly reduced taxation rate.
Trusts can be complicated, which is why it is best to leave the details to your estate planner. But you should still have a general understanding of what a trust is and does before you start pledging your assets to one.