Trust Fund Account
The world of trusts is not one-size-fits-all. The type of trust you choose should reflect your unique wishes for how your assets are handled now and in the future.
“A trust can help you navigate specific tax concerns or creditor protection, ensure your wealth supports your family, or leave a legacy for a charitable cause you believe in,” says Terry Ruhe, senior vice president and regional trust manager for U.S. Bank Wealth Management. “Whatever your wishes, there’s a trust for you.”
The two basic trust structures are revocable and irrevocable. The biggest difference is that revocable trusts can be changed after they are created, while irrevocable trusts typically cannot.
(There are a few exceptions, though, as state laws can vary considerably.1)
“Both revocable and irrevocable trusts can provide specific benefits depending on your intent,” Ruhe continues.
Revocable trusts
As stated above, a revocable trust – also referred to as a living trust – is one that can be changed after it’s created. “A revocable trust can accomplish many of the same things as a will. However, there’s one key difference,” says Ruhe. “By creating and transferring your assets to a revocable trust, you can avoid the probate process that’s required for a will.” Probate can be both lengthy and public, and a revocable trust usually is not public.
Because you can make changes to your revocable trust at any time, for certain purposes you are still viewed as the owner of the assets – even though you have a trustee who manages the trust for you. For example, you’ll be responsible for making tax payments and reporting on the trust’s investment returns, and revocable trust assets are includable in your estate and are available to creditors.
You can set up your revocable trust to play out in several different ways, too. You can have your revocable trust end upon your death, and have all assets distributed to your beneficiaries at that time. You can also set it up so that when you pass away, that revocable trust automatically creates irrevocable trusts that continue for different people or institutions.
Irrevocable trusts
You typically cannot change or amend an irrevocable trust after it’s created. The assets move out of your estate, and the trust pays its own income tax and files a separate return. This can give you greater protection from creditors and estate taxes.
As stated above, you can set up your will or revocable trust to automatically create irrevocable trusts at the time of your death. When you use your will to create irrevocable trusts, it’s called a testamentary trust. But you can also set up irrevocable trusts during your lifetime.
There are a variety of irrevocable trust types to choose from, depending on your unique circumstances. “Your reason for setting up an irrevocable trust is critical in helping you select one that fits your needs,” says Ruhe. Are you setting up a trust to:
- Transfer wealth to the next generation?
- Keep a family business in the family?
- Leave a legacy with a charity you support?
- Minimize estate taxes for you or your beneficiaries?
- Shield your assets from creditors?
The following are scenarios where these concerns can be addressed through a type of irrevocable trust.