If you are just getting started planning your estate, you may feel overwhelmed by all your options. This is especially true when it comes to trusts.
Under Pennsylvania law, trusts can be adapted to meet many personal situations and goals. This adaptability makes them very useful tools, but it can also make the whole subject intimidating to people who are just beginning to learn about them.
In this blog post, we will talk about some of the biggest distinctions between types of trust. Hopefully, when you are armed with this information, you will be in a better position to decide whether you need a trust, and to narrow down which type of trust you want in your estate plan.
To begin, let’s talk about the basics of trusts.
A trust is a legal and financial relationship involving property. The person who starts a trust is known as a grantor. The grantor places money into the trust, where it is controlled by a person or entity known as the trustee. The trustee then manages the trust for the benefit of the grantor’s chosen beneficiaries.
In a fairly typical case, a grantor establishes a trust, naming a lawyer or other professional as a trustee. The beneficiaries may be the grantor’s adult grandchildren. This trustee then manages the assets in the trust, investing them so that they grow, and distributing them to the beneficiaries according to the instructions in the trust. For instance, the trust may call for the trustee to distribute checks on an annual or semi-annual basis.
Living and testamentary trusts
Some people establish a trust through their will. This type of trust is known as a testamentary trust and goes into effect upon the grantor’s death.
However, trusts can also go into effect while the grantor is still alive. This type of trust is known as an “inter vivos” or living trust.
Revocable and irrevocable
You can further narrow down living trusts into two main categories: revocable and irrevocable trusts.
A grantor who establishes a revocable trust can make changes to the trust, such as naming new beneficiaries, or altering the terms of how the assets in the trust should be invested or distributed. Upon the grantor’s death, the trust becomes irrevocable.
However, a grantor can also establish an irrevocable trust while they are still alive. Compared to a revocable trust, an irrevocable trust gives the grantor much less control, but it has some powerful advantages.
Because it’s harder to change the terms of an irrevocable trust, it’s harder to withdraw its assets. This means the assets in an irrevocable trust have more protection from tax penalties or creditors.
Consider your options
When you’re thinking about what kind of trust you should have in your estate plan, ask what is most important to you: control or protection?
If your family is still growing, control might be more important to you. This could mean a revocable trust is a better fit.
If protecting your property for the next generation is more important to you, the advantages of an irrevocable trust may appeal to you.