A trust can be a vital component in an estate plan. What they offer:
* Protection against possible incompetency. To protect yourself, you can form a trust and transfer your assets into it. You can be the trustee so you’ll control the trust assets and enjoy the income. A successor trustee will take over if you’re incapacitated.
* Probate avoidance. Assets held in trust also avoid probate, which can be expensive and time-consuming. In the trust documents, you can state how the trust assets will be distributed at your death.
* Protection for your heirs. At your direction, after your death a trustee can keep trust assets from being squandered or lost in a divorce.
If your heirs are young, you can set up a trust to remain in effect until they are, say, 30 or 35 and can handle their own finances. Another option is to keep the trust in effect for the lives of the beneficiaries.
A trust can be revocable or irrevocable.
* A revocable trust must be created during your lifetime. If you change your mind, you can revoke the trust and reclaim the assets as your own. A revocable trust can offer incapacity protection and probate avoidance but not tax reduction.
* An irrevocable trust can be created while you’re alive or at your death. A revocable trust may become irrevocable at your death.
Assets transferred to an irrevocable trust during your lifetime may be beyond the reach of creditors and divorce settlements. The same is true of assets going into an irrevocable trust at your death.
Your heirs can be the beneficiaries of an irrevocable trust while a trustee or co-trustees you have named will be responsible for distributing funds to those trust beneficiaries. The trustee will be responsible for protecting trust assets from foolish spending and con artists.
The costs of setting up a trust might range from several hundred to several thousand dollars, depending on where you live and the type of trust you want.