The Different Types of Trust

The term, “trust fund” brings to mind images of blond-haired debutants and their manicured suitors spending their father’s hard-earned money on Greek weekends and cotillion dresses. However, not everyone who has a trust is necessarily wealthy. There are two main types of trusts.

What is a Trust?

When a person wants to ensure that a certain amount of their money goes to benefit another individual, they will create a trust. A trust documents an arrangement where the legal title to a property is entrusted to a person or a fiduciary (the trustee) to hold and distribute to a beneficiary.

The assets in a trust are considered to be the property of the trust. The trustee has no rights to the funds, they are merely in charge of the distribution of them. The two main types of trust are revocable and irrevocable.

Revocable Trusts

When a person is still alive, they can create a living trust for their loved ones. Because the trustmaker is still alive, they can modify the terms at any time or even revoke it entirely. The trustmaker can establish the trust and act as the trustee.

You may wonder why a person would bother to create a trust, instead of just giving money to their loved one.

It is a common myth that a person who wants to protect their assets from creditors and the IRS,  can put the money in a trust to protect it. A person’s creditors will still be able to attempt to collect funds that are in a trust as long the trustmaker is still alive.

A trust may impede the progress of collection efforts as the creditor will have to petition for a court order to be able to garnish the funds.

The main reason people will create trust is to avoid probate. Probate is the process of proving that a will is legal and valid. If a person creates a living trust, when they pass away the beneficiary will retain the funds. Those funds will not be subject to probate.

Irrevocable Trust

An irrevocable trust is one that cannot be touched, altered, or taken back. It is possible to buy a life insurance policy and put it into a trust so that the person you intend the money to go to gets all of it. You will not be able to act as the trustee if you have such an insurance policy but you might get to select the trustee.

When a person dies, their estate still has a tax liability to pay. The tax is based upon the entire value of the estate. If you get an irrevocable trust life insurance policy, you will reduce the official amount of your estate. There will be fewer taxes on a smaller estate.

If you have a relative who receives government aid, you may be afraid to leave them money for fear it will hurt their benefits. If you have an irrevocable insurance policy, it will protect benefits such as Medicaid.

You can protect their assets by specifying what the funds you leave them are to be used for. If they receive aid for food and rent, you can specify that the money in the trust will be used for education and travel.

You want your family to be happy and healthy for years to come after your death. Find out how careful estate planning can be the key to making sure your legacy lives happily ever after.