Each of the various types of trusts available has particular advantages. An estate attorney can advise you about the type of trust that is most appropriate for you and your family situation. The testamentary trust and living trust will be discussed here.
A testamentary trust is a legal instrument contained in the will that sets up the management of assets for one or more beneficiaries following the death of the person creating the trust (grantor). This type of trust is created by the will and a trustee is named in the will. A testamentary trust is revocable until death or incapacity and has no effect until death and admission of the will to probate. This type of trust is generally used for minor beneficiaries or when you do not want beneficiaries to inherit the estate outright.
A living trust (also known as an intervivos trust) is a form of a contract entered into during the lifetime of the person creating the trust. It is established during the grantor’s (creator’s) life and may continue after the grantor’s death. A living trust transfers property to heirs at the grantor’s death without that property being subject to probate. A trustee manages the property and distributes the income and principal according to the grantor’s instructions in the trust document. You will need a simple will to dispose of property that you did not put in the trust. You must remember to put property into the trust and to transfer title to the name of your trustee. A living trust should be accompanied by a pour-over will. This document will allow any assets that were not formally transferred to the trust during the life of the decedent to be "poured over" into the trust. These assets will then become part of the trust principal when the decedent dies. A living trust is a separate document and may have provisions that only take effect at the death of the grantor.
Living trusts can be revocable or irrevocable. With revocable trusts, you have control of the trust and can change the beneficiary, trustee, or other terms and can dissolve or revoke it. The person making the trust retains the right to use the property. The trust is used to manage assets and to avoid probate. Generally, assets still can be included in your gross estate for tax purposes.
Irrevocable trusts are permanent and cannot be revoked or changed. The grantor relinquishes all control over the disposition of the property placed in the trust and the income from it. This type of trust can have enormous tax advantages when the trust is not considered a part of your estate for tax purposes.