Trusts can play an important role in estate planning partially because they help to manage and distribute assets according to a grantor’s wishes in ways that allow for greater control than asset distribution via a will. Different trusts offer different benefits, and these may include avoiding probate, preserving wealth for beneficiaries and ensuring privacy.
By evaluating the different kinds of trusts and choosing suitable ones for an estate plan, a grantor can address the needs of their beneficiaries while better ensuring that their wishes are clearly established and enforceable.
How does a trust work?
A trust is an estate planning tool that allows a grantor to put assets in the control of a trustee to be held for the benefit of the trust’s beneficiaries. The grantor sets the terms of the trust, including who gets the assets and when.
The two categories of trusts are revocable trusts and irrevocable trusts. Each serves different purposes and offers distinct advantages and limitations.
A revocable trust, also known as a living trust, allows the grantor to retain control over the trust assets during their lifetime, and the grantor typically serves as the trustee. The grantor can alter or revoke the trust at any time. One of the primary benefits of a revocable trust is that it helps avoid probate, the legal process through which a deceased person’s estate is administered. Avoiding probate can save time and money and provide privacy since probate proceedings are public records.
An irrevocable trust can’t be easily altered or revoked once it has been established unless the grantor gets permission from the beneficiaries and the court. Once the grantor transfers assets into an irrevocable trust, they relinquish control over those assets, and the trustee assumes responsibility for managing them according to the trust terms. Irrevocable trusts offer greater protection from creditors because the creator hands over the management of the trust to the trustee.
A trust is only one component of an estate plan. Anyone who’s setting up their plan should consult with a legal representative who can help to ensure their estate wishes are clearly relayed.