While you’re alive, you can create two types of trusts:
* Revocable trusts. Such trusts can be cancelled or altered after they’re created. When you create such a trust and transfer assets into it, you can be the trustee, manage the assets, and receive the income.
If you become incompetent, control of the trust can pass to a successor trustee you’ve named, so you’ll be protected. At your death, trust assets won’t go through probate.
However, a revocable trust will not provide you with shelter from income or estate tax.
* Irrevocable trusts. Transfers to these trusts are meant to be permanent. Thus, transferred assets can be out of your taxable estate.
There may be income tax shelter, too, because an irrevocable trust can have some income that’s taxed at low rates.
One strategy is to name your spouse or other relative as beneficiary of an irrevocable trust you create. That relative will have access to the trust assets.
After you create an irrevocable trust, you must transfer assets to it in order to get any benefits. However, transfers to trusts usually don’t qualify for the annual gift tax exclusion. To qualify for the exclusion, you can give the trust beneficiaries the chance to withdraw the transferred assets.