Wills and trusts are two components of an estate planning strategy. While many Pennsylvania residents have straightforward wills that leave everything to their surviving spouse or children, trusts take more effort to create and perhaps manage.
The estate planning process can be as easy as drafting a will or become more complicated by adding a trust account. A trust has named beneficiaries whose bequests are not subject to inheritance taxes. Trusts may protect assets from creditors once you die and may allow the estate to settle without the time and expense of probate.
Types of trusts
Trusts are legal instruments for which you provide instructions on how, when and to whom a trustee distributes that account’s assets. The following sections describe two of the most common types of trusts.
You manage this trust and can transfer and remove assets as you wish. You can also change the directives affecting beneficiaries. If someone falls out of favor, you can remove them as a beneficiary. Transferring assets to this trust will not reduce the estate’s value, and creditors may seize the assets. Upon your death, this revocable trust automatically converts to an irrevocable trust managed by the trustee you previously named in the account’s instructions.
An irrevocable trust’s directives are challenging to modify. Once you transfer assets to the account and appoint a trustee other than yourself, you no longer own or manage the trust’s property — the trust does. You may want to consider an irrevocable trust if you are interested in lowering the value of your estate for tax purposes or if you wish to qualify for Medicaid. Because you no longer own the assets, creditors cannot claim them. You cannot change beneficiaries, but you can continue to fund the account. Upon your death, the trustee distributes the assets according to your directives.
It’s never too late to consider creating a trust. At the very least, it will save your beneficiaries from the delays often associated with probate.