Trusts are an important part of the estate plan, but they are also a very confusing part of the estate plan. Maybe people don't fully understand them, so let's explain them as plainly and simply as possible. A trust is a contract which says that any piece of property or asset that is assigned to the trust is under the control of the trust -- not the control of the beneficiaries of the trust, or even the maker of the trust.
However, the whole point of the trust is to benefit both of those parties anyway. The primary function of trusts is to enhance the financial capabilities of the people involved with the trust. Trusts can help a family avoid the probate process with some of their assets, and trusts can help you avoid certain taxes.
So what kind of trusts are available? Well, there are too many to get into in this space, but let's talk about three important trusts:
- Revocable trust: This is a very common form of trust. It can be edited and modified -- and, yes, revoked -- during the trustmaker's lifetime and any asset in this trust prior to the trustmaker's death could avoid the probate process upon that person's death.
- Irrevocable trust: This is similar to the revocable trust, except that assets in this type of trust can't be changed, altered or removed once the trust is created and established.
- Special Needs trust: This is a very important trust for those who receive Social Security or other government benefits. The Special Needs trust allows the individual to avoid disqualifying themselves for their benefits while still securing critical financial protections for themselves via a trust.
Source: FindLaw, "Types of Trusts," Accessed April 10, 2015