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Understanding common types of trusts

On Behalf of | Sep 28, 2020 | Estate Planning

When planning your estate, you will learn about various types of trusts. Establishing a trust can protect assets for your descendants and help them minimize the tax expense associated with an inheritance. 

Review the common types of trusts to explore how they may fit into your estate plan. 

Living trusts

trust you create and fund during your lifetime is a living trust. You can establish either an irrevocable or revocable living trust. 

With an irrevocable trust, you can avoid estate taxes. However, you cannot make changes to this type of trust after transferring assets to the ownership of the trust. Revocable trusts do not share the tax benefits of an irrevocable trust, but they allow you to make changes at any time for any reason. 

Living trusts offer the benefit of probate exemption, so inheritors will receive the trust assets right away. You can also maintain your privacy by placing sensitive assets in a living trust. 

Testamentary trusts

You may want to establish a testamentary trust for the purposes of charitable giving, providing for a spouse or a child with special needs, or passing down assets to children from more than one marriage. You can create this type of trust in your will to be automatically funded after you die. 

Within these two main categories of trust, you can choose from countless arrangements depending on your specific estate planning situation. For example, an irrevocable life insurance trust provides tax shelter for individuals who have large estates. Exploring these options with a professional can guide the division of your assets in alignment with your wishes.