You may use different types of trusts as part of your estate plan to satisfy various objectives. It may be hard for a layperson to sort it all out, so it is our job to provide understandable explanations.
With this in mind, we will take a look at two commonly used trusts that can be beneficial even if you are not a multimillionaire.
Revocable Living Trust
The revocable living trust is a very effective estate planning tool and an ideal alternative to a simple will. One of the reasons people use living trusts is to facilitate asset transfers outside of probate.
If you use a will, your executor will admit the document to probate, and a court will supervise the estate administration process. During probate, creditors must receive time to come forward to make claims on the estate so final debts are paid.
The executor will notify the beneficiaries, identify and inventory the assets, and prepare the assets for distribution. This may involve appraisals and liquidation of property.
Your final affairs are an open book if your estate passes through probate because interested parties can access public records to dig into the details. Plus, probate opens a window of opportunity for disgruntled individuals who may want to challenge the terms of the will.
You can avoid these pitfalls by using a living trust as your primary asset transfer vehicle. During your life, you act as trustee and have total control of the assets. You name a disability trustee to assume trustee duties in the event of your incapacity and upon your death, your successor trustee is empowered to distribute assets to the beneficiaries, without court involvement. Although these are not pleasant things to think about, preparing in advance can make the experience a more positive one for your family and beneficiaries.
With a living trust, you can include spendthrift protections to protect your beneficiaries from their creditors. You can also instruct the trustee to distribute limited assets over an extended period of time to make them last longer and be available when needed.
A testamentary trust is a trust that is embedded in a will. If you create a will with a testamentary trust, the trust doesn’t become effective until you pass and your will is admitted to probate. After your death, the executor follows your instructions and takes the necessary steps to establish the trust.
Since minors cannot handle their own money, parents of dependent children often use testamentary trusts. This type of trust can be funded with life insurance proceeds, so it is an effective way to provide parents with peace of mind.
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