Which Type of Trust is Right for You?
Mirror, mirror on the wall, which is the best trust of all? When faced with choosing between the myriad of trusts that exist, you may feel the situation is as random as a witch getting an answer from a talking mirror. However, each trust serves a specific type of purpose. The key is in knowing what you need.
There are two basic types of trusts, living trusts and testamentary trusts. Living trusts are created during the creator’s lifetime. Testamentary trusts, in comparison, are set up in wills and spring into existence only after death.
Some of the common types of trusts are:
Living Trusts: These can be either revocable or irrevocable.
- Revocable Living Trusts allow you to retain control of the assets in your trust. You’re able to change the terms of the trust at any time.
- Irrevocable Living Trusts typically don’t allow you to make changes without the beneficiary’s consent. In other words, the assets in the trust are no longer yours. An advantage, however, is that the appreciated assets in the trust aren’t subject to estate taxes.
Generation Skipping Trusts: Sometimes called a “dynasty trust”, this trust allows you to transfer money tax free to beneficiaries who are at least two generations your junior—typically to your grandchildren. A generation skipping trust may be created under a revocable or irrevocable living trust or a testamentary trust.
Special Needs Trust: This trust is established for a person who is receiving government benefits. Usually, when a person is receiving government benefits, an inheritance or a gift can eliminate the person’s eligibility for such benefits. With a special needs trust, the beneficiary can inherit money without defeating his eligibility for government benefits. A special needs trust can be created under a revocable or irrevocable living trust or a testamentary trust.
As you can see, there are many types of trusts and one size does not fit all. In fact, a trust may not even be necessary for you at all. Consulting with an estate lawyer can help you decide what type of plan is best for your unique situation.