When do Trusts and Wills go into effect?

Will vs. Trust: What’s the Difference?

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When you hear the words “trust” or “trust fund,” the first image that may come to mind is a wealthy family in a mansion with inherited wealth passed down from generation to generation. If asked what a trust or trust fund is, many people would probably be hard pressed to offer up an accurate definition.

What is the difference between a will and a trust

However, there is nothing particularly mysterious or overly difficult to understand about a trust or a trust fund, nor do you have to be a member of the Rockefeller clan or the Gates family, to set up and benefit from a trust. A trust is a legal vehicle that greatly expands your options when it comes to managing your assets, whether you’re trying to shield your wealth from taxes or pass it on to your children. “A trust,” according to Fidelity Investments, “is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries.”

A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries. Since trusts usually avoid probate, your beneficiaries may gain access to these assets more quickly than they might to assets that are transferred using a will. Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death. Assets in a trust may also be able to pass outside of probate, saving time, court fees, and potentially reducing estate taxes as well.

Other benefits of trusts include:

Control of your wealth. You can specify the terms of a trust precisely, controlling when and to whom distributions may be made. You may also, for example, set up a revocable trust so that the trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.

Protection of your legacy. A properly constructed trust can help protect your estate from your heirs’ creditors or from beneficiaries who may not be adept at money management.

Privacy and probate savings. Probate is a matter of public record; a trust may allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.

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Basic types of trusts explained:

Asset Protection TrustAn asset protection trust (APT) is a trust vehicle that holds an individual’s assets with the purpose of shielding them from creditors.
  Charitable TrustA charitable trust is an irrevocable trust established for charitable purposes and, in some jurisdictions, a more specific term than “charitable organization”.
  Generation Skipping TrustA generationskipping trust is a type of trust that designates a grandchild, great-niece or great-nephew or any person who is at least 37 ½ years younger
  Irrevocable Life Insurance TrustAn irrevocable life insurance trust (ILIT) is created to own and control a term or permanent life insurance policy or policies while the insured is alive, as well as to manage and distribute the proceeds that are paid out upon the insured’s death.
  Irrevocable TrustAn irrevocable trust is a trust whose terms can’t be modified, amended, or terminated without permission from the beneficiary or beneficiaries. Irrevocable trusts can be used to protect assets, reduce estate taxes, get government benefits and access government benefits.
  Marital TrustA marital trust is a fiduciary relationship between a trustor and trustee for the benefit of a surviving spouse and the married couple’s heirs.
  QTIPA qualified terminable interest property is an irrevocable trust that enables a grantor to provide for a surviving spouse, and other beneficiaries.
  Special Needs TrustA Special Needs Trust (SNT) allows for a disabled person to maintain his or her eligibility for public assistance benefits, despite having assets that would otherwise make the person ineligible for those benefits.
  Spendthrift TrustA spendthrift trust is a trust designed so that the beneficiary is unable to sell or give away her equitable interest in the trust property. The trustee is in control of the managing the property.
  Testamentary TrustA testamentary trust is a type of trust that is created after the grantor dies. This type of trust is created by the grantor’s Will. The only way to execute the provisions laid out in a decedent’s Will in California is to enter the document into probate.
Chart of Top 10 Types of Trusts

Revocable vs. irrevocable

There are many types of trusts; a major distinction between them is whether they are revocable or irrevocable.

Revocable trust: Also known as a living trust, a revocable trust can help assets pass outside of probate, yet allows you to retain control of the assets during your (the grantor’s) lifetime. It is flexible and can be dissolved at any time, should your circumstances or intentions change. A revocable trust typically becomes irrevocable upon the death of the grantor.

You can name yourself trustee (or co-trustee) and retain ownership and control over the trust, its terms and assets during your lifetime, but make provisions for a successor trustee to manage them in the event of your incapacitated or death.

Although a revocable trust may help avoid probate, it is usually still subject to estate taxes. It also means that during your lifetime, it is treated like any other asset you own.

Irrevocable trust: An irrevocable trust typically transfers your assets out of your (the grantor’s) estate and potentially out of the reach of estate taxes and probate, but cannot be altered by the grantor after it has been executed. Therefore, once you establish the trust, you will lose control over the assets and you cannot change any terms or decide to dissolve the trust.

An irrevocable trust is generally preferred over a revocable trust if your primary aim is to reduce the amount subject to estate taxes by effectively removing the trust assets from your estate. Also, since the assets have been transferred to the trust, you are relieved of the tax liability on the income generated by the trust assets (although distributions will typically have income tax consequences). It may also be protected in the event of a legal judgment against you.

Deciding on a trust

State laws vary significantly in the area of trusts and should be considered before making any decisions about a trust. Consult your attorney for details.