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Estate planning: 5 common types of trusts

On Behalf of | Dec 8, 2023 | Estate Planning

Trusts are a vital component of many estate plans, offering flexibility, control and protection of assets for future generations. They serve various purposes, as there are several types, each designed to meet specific needs and objectives.

Understanding how trusts operate can help you make informed decisions about effectively managing and protecting your assets.

Revocable living trust

A revocable living trust is a flexible estate planning tool that allows you to keep control over your assets during your lifetime. You can alter or revoke the trust as your circumstances or intentions change. This type of trust helps avoid probate, provides privacy and offers seamless asset management transition after your death.

Irrevocable trust

An irrevocable trust generally can’t be modified or revoked. It’s often used for asset protection and tax benefits. Assets placed in an irrevocable trust are typically removed from your taxable estate, which can be advantageous for estate tax planning.

Charitable trust

Charitable trusts are set up to benefit a charitable organization or cause. There are two main types: charitable remainder trusts and charitable lead trusts. Charitable remainder trusts provide income to the grantor or other beneficiaries for a period before the remainder goes to charity. Charitable lead trusts are set so the charity receives the income first before the remainder passes to your beneficiaries.

Special needs trust

A special needs trust is designed to provide financial support to a beneficiary with disabilities without affecting their eligibility for government benefits, such as Medicaid or Supplemental Security Income. This type of trust helps to ensure that a beneficiary can receive supplemental funds without jeopardizing their access to essential government assistance.

Testamentary trust

A testamentary trust only comes into effect after the grantor’s death. This type of trust can be used to manage and protect assets for beneficiaries who are minors, financially inexperienced or need assistance in managing an inheritance. It allows for a degree of control over how and when the assets are distributed after death.

When considering a trust, evaluating your circumstances and objectives is essential. Seeking legal guidance can help you to determine which type(s) of trust best aligns with your estate planning strategy. Remember, the right trust can provide peace of mind and better ensure that your assets are managed and distributed according to your wishes.