A trust is part of the process of estate planning, which involves deciding how a person wants his or her assets distributed after they die (or become unable to make their own financial decisions).
A trust is a legal entity that outlines conditions on how certain assets are distributed upon a person's death. Trusts also can help minimize gift and estate taxes.
How is a Trust Different From a Will?
A trust does not replace a will. Usually, Trusts deal only with specific assets, such as life insurance or a piece of property. A Will deals with distribution of nearly everything else in an estate.
3 Basic Types of Trusts
- Testamentary Trust: A testamentary trust doesn't take effect until after the person is deceased. It must go through probate before the trust is established. This means that the funds must first become public record and will most likely be reduced due to attorney and court fees from probate. The funds entering into a trust are taxed according to the current estate tax law.
- Revocable Trust: With a revocable trust, the person retains control of all the assets in the trust, and can revoke or change the terms of the trust at any time.
- Irrevocable Trusts: Irrevocable trusts typically can't be changed without the beneficiary's consent. But the appreciated assets in the trust aren't subject to estate taxes.
Each type of trust has advantages and disadvantages. A trust is a legal entity, so you must follow state rules to ensure that the trust is set up correctly. Have your elderly parent discuss the options thoroughly with an estate-planning attorney before setting one up.