The Four Different Types of Trusts

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In estate planning, Trusts can be established to easily transfer assets to heirs. With the right set-up, assets in a Trust can avoid Probate and taxation, and immediately pass from the original owner to the heirs.

There are four main categories of Trusts, which are based on when it goes into effect and who owns the assets.

Living Trusts vs. Testamentary Trusts

All Trusts are set up by you, the grantor, during your life. However, not all Trusts immediately go into effect. Depending on when it becomes effective, it's either a Living Trust or a Testamentary Trust. 

Living Trusts: When a Trust is created and then immediately become effective.

Testamentary Trusts: When a Trust is created and then does not become effective until after your death. These are often created within Wills, and the person who created it is called the “testator.”

Revocable Trusts vs. Irrevocable Trusts

All Trusts are either Revocable or Irrevocable. 

Revocable Trusts: You retain ownership and control of the property in the trust and can change the terms, including the trustees and beneficiaries

Irrevocable Trusts: You give ownership and control of the property in the Trust to others (Trustees) and no longer own or control the property, thus making you unable to enact changes. 

Tax Implications During Your Life

With a Revocable Trust you are still treated as the owner of the property, and can be taxed on that property during your life. With an Irrevocable Trust, you give up ownership of the property and are no longer liable for it and cannot be taxed. 

Reasons For Choosing A Revocable Trust vs. An Irrevocable Trust

It depends on the goals you’re trying to establish. For example, if the primary goal is to avoid excessive estate taxes, you will likely want to set up an Irrevocable Trust. If the primary goal is to maintain control of assets in the event of incompetence, you will likely want to set up a Revocable Trust. In addition, the rules of the particular Trust you’re establishing may dictate whether a Trust must be Revocable or Irrevocable. If you’re unsure about the type of Trust you want to establish you should consult a licensed trusts and estates attorney in your state.

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