Many people start their estate planning by drawing up a will. Some people take the next step to establish a trust to hold their assets. Trusts accomplish various objectives, and they differ from your will in a significant way.
Assets in a trust bypass probate, whereas wills must go through the lengthy probate process and related expenses. Trusts have several additional features, and a few more details can help you better understand this estate planning tool.
Defining a trust
You can set up a legal contract, called a trust, to hold your assets. A person or entity designated as the trustee manages the trust that holds your assets for someone else, called the beneficiary. The trustee handles the trust administration after your death.
A trust provides more control over your assets than a will. You can avoid taxes and probate and control how and when the trust distributes your assets to your beneficiaries. A trust can also protect your assets from creditors and lawsuits for both you and your beneficiaries.
How a trust works
A trust moves assets from one person to another or a bank or institution. You can put as many or few assets in the trust as you prefer, as no minimum dollar requirement exists.
You can have multiple beneficiaries for the trust, including several family members or institutions, such as a charity.
Types of trusts
Trusts offer a variety of different strategies for managing your assets. The two main categories of trusts are revocable and irrevocable. If you choose a revocable trust, you can make changes during your lifetime, moving assets in or out, or closing the trust altogether.
An irrevocable trust differs as you cannot change it once you create the trust and move your assets into it. You also give up control of the assets once placed into an irrevocable trust. Each type of trust has advantages and disadvantages, depending on your needs and estate planning strategy.
Knowing your estate planning options can help create a plan that meets your financial wishes for your beneficiaries’ future.