A trust is a type of estate plan where a person, called a trustee, holds assets on behalf of a beneficiary. The trustee has a fiduciary duty, meaning that he or she must act in the best interest of the estate. The person who creates the trust is called the grantor.
There are several advantages to creating a trust including controlling wealth, designating who receives the trust assets and avoiding probate which helps the asset distribution process remain private. In addition, it avoids the time and expense of going through the probate process.
There are two types of main trusts that are important to understand, revocable trusts and irrevocable trusts. A revocable trust’s provisions can be changed or dissolved at any time. It is effective as soon as it is signed and once the grantor’s assets are titled in the name of the trust.
However, there are no tax benefits to using this type of trust. The assets in the trust are owned by the grantor and creditors can still make claims against the trust for outstanding debts.
Once an irrevocable trust is created and the assets are transferred into the trust, it cannot be changed except in very limited circumstances. Essentially, the grantor no longer owns the assets and they are removed from his or her estate.
This type of trust provides protection from creditors and can reduce or eliminate estate taxes. Also, certain government programs such as Medicaid require beneficiaries to have limited income and assets. An irrevocable trust can help move assets away from the individual, thereby qualifying for coverage.
An experienced estate planning attorney can provide guidance and advice about which type of trust is the right fit for each individual’s circumstances.