Creating a trust is an increasingly popular way of protecting assets. It’s an effective method for providing for your family and growing wealth.
Understanding the various types of trusts available can help you decide if setting up a trust is right for you.
What is a trust?
A trust is a legal document that states one party, “the grantor,” places all of their assets into the care of another party, “the trustee.” The trustee holds and manages the assets for the benefit of a third party, “the beneficiary.”
A living trust is created when the grantor is still alive, and the grantor can still use the assets while they’re alive. Everything passes directly to the beneficiary when they die, bypassing the probate process. A living trust can either be revocable (the grantor can change the terms at any time) or irrevocable (the trust can’t be changed without the beneficiary’s consent).
A testamentary trust is part of an individual’s will and does not go into effect until the grantor has passed away and their estate goes through probate. The will specifies which assets are to be transferred into the trust.
Both types have their advantages. A living trust:
- Allows your estate to avoid probate.
- Maintains your privacy. A will becomes public record once it enters probate.
- Depending on the size of your estate, it may reduce taxes.
The advantages of a testamentary trust include the following:
- Maintaining control over your assets until your death.
- It can offer financial protection for your beneficiaries if they are minors, have special needs, or aren’t fiscally responsible.
- It’s flexible. Changing the trust is as easy as changing the terms of your will.
If you choose to create a trust, you should work with someone who can help you better understand your options and ensure your trust is legally sound.