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Learn about the different types of estate trusts

Trusts are financial arrangements which hold assets in safekeeping for you, for other people, for beneficiaries of your will or for a charitable or commercial entity. While there are many different types of trusts, they all share a couple of fundamental characteristics: beyond holding specified assets in a financial institution, trusts also strictly define the terms which must be met in order for your beneficiaries to come into possession of those assets.

It is very important that you fully understand the conditions that apply to the various types of trusts commonly used by private citizens. Therefore, it is recommended that you work with a banking lawyer in addition to financial professionals when establishing a trust and its terms.

Common Types of Personal Trusts

The most frequently used trusts include:

  • Living trusts. A living trust acts like a corporation designed simply to hold and manage assets on your behalf while you are alive. You can make as many changes to the terms and conditions as you want. Living trusts are the opposite of testamentary trusts, which are set forth in your last will and testament (thus the name) and do not come into effect until you pass away.
  • Irrevocable trusts. An irrevocable trust is a means by which you can permanently and irreversibly transfer assets (and any appreciation those assets might enjoy) to beneficiaries. You can use irrevocable trusts to avoid probate as well as some inheritance and income taxes.
  • Revocable trusts. A revocable trust (unlike its irrevocable counterpart) can be changed or terminated anytime the grantor wants. Upon the grantor's death, revocable trusts become irrevocable.
  • Charitable trusts. A charitable trust holds assets for safekeeping until they can be dispersed to the charitable organization of your choosing.

You can also establish education trusts intended to pay for a child's future college expenses. In fact, many financial institutions offer very advantageous interest rates and tax terms on educational trusts.

Finally, you should be aware of life insurance trusts as well as credit shelter trusts. These financial products can protect the proceeds of life insurance policies and estates from taxation, and allow you to skip generations, if you so choose.

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