Trusts created during life
Trusts created during life are called “Living Trusts.” Living Trusts usually take effect immediately. In general, Living Trusts are named after the creator of the trust, such as the “John A. Smith Revocable Trust,” or the “John A. Smith Irrevocable Trust.”
There are two types of living trusts:
- Revocable trusts are trusts that can be changed or terminated.
- Revocable trusts can be used to avoid probate. “Probate” is a court proceeding in which a judge determines the validity of a Will, and a personal representative collects the decedent’s assets, pays the bills, and distributes property to heirs.
- Assets that are transferred to a revocable trust are usually not subject to probate at death; however, those assets are still subject to income tax, federal estate tax, and inheritance tax.
- Irrevocable trusts cannot be changed after they are created.
- Irrevocable trusts are commonly used to provide income or support for heirs.
- Assets that are transferred to an irrevocable trust may be subject to federal gift tax. The property is usually not subject to federal estate tax or state inheritance tax.
Trusts that take effect at death
Trusts that take effect at death are called “Testamentary Trusts.” A testamentary trust is a trust that is created in a Last Will and Testament.
- Testamentary trusts do not take effect until the creator of the trust dies.
- Many married couples draft a Will that establishes a trust for their children if both spouses pass-away simultaneously. The trust only takes effect if both spouses die, and no one is left to support their children.
- These trusts serve several purposes. In most cases, testamentary trusts are used to provide professional money management for children.