The 3 Most Common Types of Trusts: Which Do You Need? (2024)

A trust is an excellent estate planning option if you’re interested in having legal protection for your assets. It ensures that your remaining assets are distributed accordingly, saves time, reduces unnecessary paperwork, and can even reduce estate taxes.

If you’re planning your estate, a trust is an essential tool to incorporate.

If you’ve just begun researching trusts for your estate, you may be undecided about which one is right for your needs. Today we’re going to discuss a few common types of trusts worth considering.

Do you need help creating an estate plan that protects your and your family’s future? If so, contact a knowledgeable and reliable attorney from Cary Estate Planning. Get in touch with us today to schedule a free consultation.

Estate Planning: 3 Common Types of Trusts

Let’s take a look at three common types of trusts that will help protect your assets.

Revocable Living Trusts

Thanks to the greater sense of control over assets, a revocable trust often makes the most sense for many individuals. A living trust is a legal document created by you that requires you to name a trustee. The trustee has a responsibility to ultimately manage your assets according to the rules you set when creating the trust.

A revocable living trust allows you to modify and even cancel your trust at your convenience while alive. Not only that, but a revocable living trust gives you the freedom to:

• Add more assets or remove assets from the trust
• Remove old beneficiaries
• Add new beneficiaries
• Change the guidelines of the trust
• Sell off the trust assets
• Avoid probate

Upon death, the trust will become irrevocable. While this type of trust allows your beneficiaries to avoid probate, it does not offer as much tax protection as an irrevocable trust. But the convenience and flexibility of making changes as needs arise are what make this trust ideal for many families.

Because a revocable trust can only deal with the assets named in the trust, this type of trust is commonly used in conjunction with a pour-over will. This type of will directs anything not named in your will into the revocable living trust. It is important to note that any assets captured by the pour-over will must first go through probate before they can be transferred into the trust.

A revocable living trust is best for: those who want more flexibility and control over the distribution of their assets.

Irrevocable Living Trusts

There are many key similarities between an irrevocable trust and a revocable one. But the main difference is the fact that an irrevocable living trust means that you can’t cancel or change it once it’s been established.

With an irrevocable living trust, you can essentially transfer assets without having the full freedom to change certain things.

Some aspects of the trust you won’t be able to easily change include:

• Your listed beneficiaries
• The initial instructions established in the trust
• The ability to sell off assets

Those with an irrevocable trust will find that changing the terms isn’t the easiest process. To modify this trust, you will need an agreement signed by the trustee and all beneficiaries. In essence, you need the permission of the beneficiaries to change any of the aspects listed above. Another option is to get an order from a judge.

An irrevocable living trust is less common than a revocable one because it has more restrictions. Due to this fact, it’s best to be confident about your decisions, including who your trustee is, your beneficiaries, and the terms of the trust.
So why would someone choose an irrevocable trust over a revocable one?

Irrevocable trusts afford the grantor and their beneficiaries many more estate tax benefits than a revocable trust. For people with high net worth, this may be a more desirable option because it allows high-value assets to have estate tax exemption.

An irrevocable living trust is best for: those who are looking for an extra layer of protection for their assets and want to minimize taxes associated with the estate.

Asset Protection Trusts

An asset protection trust (APT) is essentially how it sounds. The primary goal of an asset protection trust is to protect assets from potential creditors.

In terms of preservation, asset protection trusts shield against things like:

• Creditors
• Lawsuits
• Judgments against your estate

It’s important to note that asset protection trusts are self-settled, which means you can be a designated beneficiary and access your assets at any time. When structured properly, grantors should be able to successfully prevent creditors from going after assets.

Let’s take a look at the two types of asset protection trusts:

• Domestic APTs. This provides the most flexible asset protection trust laws in the U.S., offering a simple setup. But they are only available in 17 states, not including North Carolina. If you’re considering this type of trust, you will need to work with an estate planning attorney to establish the trust in another state.
• Foreign APTs. A foreign APT is held in an offshore account, meaning it’s outside the U.S. Many people prefer a foreign APT because it has additional privacy measures compared to a domestic one. While more expensive, it’s a great option if you’re concerned about your assets being at risk.

An asset protection trust is best for: Anyone can get an asset protection trust. But those who will benefit the most are business owners and individuals who have relatively higher incomes and assets. More specifically, anyone with a net worth over $250,000 should consider an asset protection trust.

The Bottom Line

There are many trusts that individuals can take advantage of. If you’re undecided about the right one for you and your assets, it’s important to consider your financial goals, both current and future. Additionally, it’s important to consider your current financial profile to see which trust you will benefit from the most.

With that said, revocable trusts, irrevocable trusts, and asset protection trusts are among some of the most common types to consider. Not only that, but these trusts offer long-term benefits that can strengthen your estate plan and successfully protect your assets.
To learn more about which trust is the right option for your estate, schedule your free, no-obligation consultation today.