Many people need more than a simple will in their estate plans. These people often choose to create a trust to protect their family's assets. There are many types of trusts available, each with different purposes.
The most basic categories of trusts are revocable and irrevocable. A revocable trust, also known as a living trust, is created so that its drafter can alter it during his or her lifetime. Additionally, a trustmaker can modify it, add to it and even revoke it altogether. A revocable trust can help protect an estate from the cumbersome probate process.
An irrevocable trust cannot be altered, changed, modified or revoked after it is created. Another type of trust is an asset protection trust. And like its name denotes, this type of trust is designed to protect the assets of the trustmaker from claims of future creditors. Often, these trusts are set up in countries outside of the United States in order to help insulate these assets from creditors.
A charitable trust is designed to benefit a particular charity, or the public in general. This can have some big advantages over simply donating a lump sum to the charity.
Another common type is a special needs trust, which is set up for a person who receives government benefits so a beneficiary is not disqualified from these benefits.
A spendthrift trust is a trust that does not allow the beneficiary to sell or pledge away his or her interests in the trust. A tax by-pass trust is used in some situations to avoid estate taxes. A Totten trust is a revocable trust that is created by continually depositing money in an account at a financial institution. This gift is not considered completed until the death of the grantor.
No matter what type of trust you decide to include in your estate plan, it is important to understand how they function and how each could be beneficial to you.