Types of Trusts:
One Size Does NOT Fit All
Inter Vivos vs. Testamentary
Trusts can be broken down into the following two main categories:
Inter Vivos, which is a a latin phrase meaning "while alive", and;
Testamentary, which means that it is created through a Last Will & Testament.
Inter Vivos trusts are formed during your lifetime and your assets are transferred into the Trust and out of your personal name. By transferring assets out of your personal name during life, you can eliminate the need for your estate to be probated after your death. There are numerous types of Inter Vivos trusts which range from relatively simple to extremely complex depending on your estate planning needs.
Testamentary trusts are formed through the probate process after your death, and are governed based on terms and provisions included in your Last Will & Testament. Testamentary trusts are most commonly utilized by parents of young children who want to provide for their kids' needs in the event of their death, but want to retain some control on how assets are used for their kids' benefit without transferring large amounts of assets directly to young individuals who may not be responsible enough to manage those assets. Unlike an Inter Vivos Trust and as you might imagine, a Testamentary Trust cannot eliminate the need for probate after death because it does not exist at all until the time of death.
Inter Vivos: Revocable vs Irrevocable
Trusts formed during your life fall into one of two main classifications, Revocable or Irrevocable. As the names imply, a Revocable Trust can be changed and modified during your life, or even revoked in its entirety. An Irrevocable Trust, however, cannot be changed or revoked except in very limited circumstances.
With Revocable Trusts, you enjoy the benefit of extreme flexibility to continue managing your assets during life without any real restrictions or complications. However, the flexibility associated with Revocable Trusts comes at a price. Assets transferred into a Revocable Trust remain subject to all ordinary taxes during your life, as well as being subject to the claims of creditors.
Unlike Revocable Trusts, Irrevocable Trusts have the significant drawback of limited flexibility because you cannot revoke or amend the Trust once it is formed (with limited exceptions). Despite the limited flexibility associated with Irrevocable Trusts, the assets transferred into them can enjoy extremely powerful asset protection from the claims of creditors, eliminate the need for probate, and drastically reduce or sometimes even eliminate various forms of taxes.
Great care should be taken when determining what type of Trust is right for your situation. Give us a call today to discuss what estate planning tools can offer you and, perhaps more importantly, your kids and other loved ones the greatest benefits and peace of mind!