Understanding Trusts

When you are creating a trust; you are creating an asset. You are utilizing resources to ensure the protection of the financial interests for yourself or your designated loved ones. Depending on the type of trust, you will be able to shape your estate and your future. 

When it comes to trusts, there are two common types: living trusts and testamentary trusts. A living trust (also known as a revocable trust) is created during a person’s lifetime, and a testamentary trust is created as a part of a will and is established after the person has passed and when the will goes into effect. 

Revocable and Irrevocable Trusts 

Whether you are the grantor, the trustee, or the beneficiary, you should still know the difference between a revocable and irrevocable living trust. A revocable living trust is made to allow you to retract or correct them whenever you feel like doing so. 

This is in comparison to an irrevocable living trust, which cannot be rejected or revised. Irrevocable living trusts are solely done to produce specific tax or asset protection results. The grantor cannot act as a trustee when forming an irrevocable living trust. 

Revocable living trusts are more commonly done, and two of the most general reasons of a revocable living trust are to avoid probate of the assets and to plan for mental instability. 

Social Security and Trusts 

Depending on which trust you pick, it can affect your additional security income benefits. If you used your assets to establish a trust on or after January 1, 2000, the trust will generally count as your resource for your additional security income. 

For those who own a revocable living trust, the entirety of the trust is considered to be your resource, while those who have an irrevocable living trust, if there are any circumstances where payment could be made to you or for your benefit, the portion of the trust from which payment could be made, is your resource. 

Other Types of Trusts 

There are other types of trusts that are created for more unique purposes. Credit shelter trusts (bypass trust or a family trust) includes writing a will entrusting an amount to the trust up to, but not exceeding the estate tax exemption. From there, you pass the rest of your estate to your spouse tax-free forever, regardless of growth. 

Qualified personal residence trusts can abolish the value of your home or vacation home from your estate and become helpful if your home increases in value. Generation-skipping trusts (or dynasty trusts) allow you to pass on a substantial amount tax-free to beneficiaries who are at least two generations younger.

Qualified terminable interest property trusts are for those that are part of a family that has included divorces, remarriages, and stepchildren and allows the grantor to direct assets to specific relatives of their choice. The living spouse will receive the income from the trust, and the specified beneficiaries will get what is left when the surviving spouse passes. 

Irrevocable life insurance trusts have the capability to abolish your life insurance from your taxable estate, while also helping to pay estate costs and provide heirs with cash. However, by removing the policy from your estate, you do give up your ownership rights, which makes it so that you are not allowed to borrow against the home or change beneficiaries. This also means the proceeds of the policy can be used to pay any estate costs after you pass, providing your beneficiaries with tax-free income. 

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