A trust is used to determine how a person’s money should be managed and distributed while that person is alive, or after their death. A trust helps avoid taxes and probate. It can protect assets from creditors, and it can dictate the terms of an inheritance for beneficiaries. The disadvantages of trusts are that they require time and money to create, and they cannot be easily revoked.
Trusts are created by settlors (an individual along with his or her lawyer) who decide how to transfer parts or all of their assets to trustees. These trustees hold on to the assets for the beneficiaries of the trust. The rules of a trust depend on the terms on which it was built.
Although there are many different types of trusts, each fits into one or more of the following categories.
Categories of Trust:
Living or Testamentary Trusts
Living Trusts, also known as Inter-Vivos Trusts, are a written document in which an individual’s assets are provided as a trust for the individual’s use and benefit during his lifetime. These assets are transferred to his beneficiaries at the time of the individual’s death. The individual has a successor trustee who is in charge of transferring the assets.
Testamentary Trusts, also called Will Trusts, specify how the assets of an individual are designated after the individual’s death.
Revocable or Irrevocable Trusts
Revocable Trusts can be changed or terminated by the trustor during his lifetime. An irrevocable trust, as the name implies, is one the trustor cannot change once it’s established, or one that becomes irrevocable upon his death.
Living Trusts can be revocable or irrevocable. Testamentary trusts can only be irrevocable. An irrevocable trust is usually more desirable. The fact that it is unalterable, containing assets that have been permanently moved out of the trustor’s possession, is what allows estate taxes to be minimized or avoided altogether.