A Guide to the Different Types of Trusts
Are you preparing to plan your estate? An estate plan can give you peace of mind that your assets are managed appropriately both during your life and after. More and more people are turning to trusts because they offer more protection than a traditional will. Wills can be contested and must go through a lengthy legal process called probate before your beneficiaries see their portion of your estate.
If you’re considering a trust, there are many different trusts you can choose from. A qualified estate planning lawyer can help you choose the right trust for your estate. In the meantime, we recommend familiarizing yourself with some of the most common types of trusts:
Revocable vs. Irrevocable Trusts
Generally speaking, there are two broad categories of trusts to choose from when working with an estate planning lawyer. Each type of trust will fall within one of these categories.
Revocable trusts — also referred to as revocable living trusts — are flexible and allow you to make changes to the trust during your lifetime. The guidelines of a revocable trust don’t become set in stone until you pass away. That means if your life circumstances change significantly, like you get divorced or acquire new assets, you can revise the terms of your trust accordingly.
Revocable trusts have an advantage over a traditional will in that they do not have to go through probate. In other words, your beneficiaries will receive their assets as outlined in the trust without going through a lengthy legal process. It’s also more difficult for creditors to claim debts from a trust.
Once the terms of an irrevocable trust are set, they generally cannot be altered or updated in any way. Although this type of trust lacks the flexibility of a revocable trust, they are considered safer. Assets held within an irrevocable trust are better protected from claims by creditors, estate tax, and gift tax. For these reasons, irrevocable trusts are a popular option for individuals with large estates looking to minimize tax liability on assets held within the trust.
Within these two categories, there is an array of specialty trusts you can choose from. The “right” trust for you depends on which one aligns best with your financial goals.
Marital Trusts (“A” Trust)
A marital trust — also known as an “A” trust — is created by an individual on behalf of their spouse. When the trust creator passes away, all of the assets within the trust will transfer to the surviving spouse. The main benefit of a marital trust is that the surviving spouse will not have to pay an estate tax on the trust’s assets during his or her lifetime.
Bypass Trusts (“B” or Credit Shelter Trusts)
A bypass trust — sometimes called a “B” trust — is an irrevocable trust that a married couple can use to reduce the impact of the estate tax on their heirs. Similar to a type “A” trust, assets within the trust will be transferred to the surviving spouse upon the first spouse’s death. However, the surviving spouse will not directly hold the assets; instead, they’re managed by the trustee until the time of the second spouse’s death. The benefit of a bypass trust is that beneficiaries will receive the remaining assets free from estate tax.
If you’d like to give a portion of your estate to a charitable cause, then a charitable trust will allow you to accomplish that. The most popular kind of charitable trust is called a charitable lead trust. With this type of estate trust, you can allocate certain assets for a charity or charities of your choice. The remaining assets will go to your beneficiaries.
Trust Planning in New Jersey
When planning for your and your family’s financial future, it’s important to have a well-crafted estate plan. Planning your estate gives you an opportunity to take stock of your assets and determine how they will be divided when you pass away. While wills are the most common form of long-term financial planning, a trust provides many benefits and protections beyond what a will can offer. Avoiding probate court and reducing estate tax are just two of the many advantages. A qualified lawyer can help you choose the right type of trust for your objectives.
We at The Knee Law Firm have extensive experience in helping New Jersey residents with a variety of estate planning matters. To learn more about what we might be able to do for you, schedule a consultation by giving us a call at 201-996-1200 or by using our online contact form.