There is no perfect trust. They all have their pros and cons. When individuals do thorough estate planning, however, they may come across a trust that feels absolutely perfect for their needs. The key is knowing what the options are to choose wisely.
Understanding specific needs is also important. It is always better to start estate planning with a specific goal in mind.
Types of trust accounts
CNN Money identifies two specific types of trusts: testamentary trusts and living trusts. Testamentary trusts get created as part of estate planning but only go into effect after the person passes away. Living trusts get set up while the person is alive. Living trusts fall into two categories: revocable and irrevocable trusts. As the names imply, the difference between the two lies in the ability to reverse the decision.
Here are some additional options:
- Generation-skipping trusts: Grandparents use this to ensure they have special arrangements made for grandchildren.
- Family trusts: Money bypassed via a will into a trust remains free of estate tax even when it generates a profit.
- Qualified terminable interest property trusts: Blended families can use this to direct money to a spouse throughout their lifetime and then to other beneficiaries thereafter.
- Qualified personal residence trust: It subtracts the value of a primary or secondary personal residence from the estate, which is helpful when homes appreciate in value.
Advantages of trusts
There are other advantages besides those highlighted above. NerdWallet points out that one of the most common reasons families choose trusts for estate planning is to ensure young people do not mismanage the money they receive.
Even responsible children may not have the financial literacy to manage money on their own. Relatives may also step in to attempt to manipulate them. Stretching the money out offers some protection to minors and young adults.
Finally, trusts offer flexibility. Families can create them for several reasons to reap different types of benefits aimed at specific beneficiaries.