It’s also off-limits in cases of remarriage and divorce. Any income generated by the trust does not have to be paid to the surviving spouse.īypass trusts offer protection to both the surviving spouse and the children from the deceased spouse’s previous marriage. The B Trust becomes irrevocable, thus safeguarding the inheritance for the deceased spouse’s children. Upon the first spouse’s death, the trust splits into two parts: an A Trust (survivor’s trust) containing the surviving spouse’s share, and a B Trust (bypass trust) containing the deceased spouse’s share. In the context of blended families, a bypass trust could prevent the surviving spouse from altering the original allocation of assets. It aims to protect and shield assets for beneficiaries while offering flexibility to a surviving spouse. Good for: Blended families for control over the disposition of assets after both spouses’ deathĪ bypass trust, also known as an AB trust or credit shelter trust, is designed for married couples. When creating a joint trust, couples should carefully discuss their individual wishes for asset distribution and consider consulting a tax advisor to understand any potential tax implications. However, this type of trust can be inflexible, particularly when it comes to tax planning or if the spouses have different beneficiaries in mind. One key advantage is administrative convenience, as there’s only one set of documents to manage. This type of trust is revocable before the second spouse passes away both parties have the ability to manage and control the assets, often with the aim of passing them seamlessly to beneficiaries upon death. Good for: Married couples who want to manage and distribute assets togetherĪ joint trust combines the assets of both spouses or committed partners for easier management and distribution. Consult an attorney before deciding what type of trust is right for you. However, the tax implications of irrevocable trusts can be complex. Unlike a revocable trust, an irrevocable trust pays its own taxes and files a separate tax return.ĭespite its lack of flexibility, irrevocable trusts offer asset security and tax advantages, making them an attractive type of trust for people with large or complex estates. Once it is established, the grantor relinquishes ownership and control of the assets listed in the trust, which are transferred out of their estate. Good for: High-net-worth individuals looking for estate tax benefits and greater protectionĪn irrevocable trust cannot be modified or revoked without its beneficiaries’ permission or the court’s interference. ► READ MORE: Setting Up a Trust: Living Trust Cost & Checklist Irrevocable Trust Revocable trusts become irrevocable trusts when the grantor dies. Keep in mind that the grantor still owns the assets in a revocable trust therefore, they must report any revenue generated by the trust on their taxes. If you expect certain life changes (e.g., birth of a child) that can prompt the need to amend a trust, consider making your trust revocable for flexibility. Good for: People looking for flexibility in managing their assets during their lifetimeĪ revocable trust can be changed or canceled by the grantor at any time as long as the grantor is mentally competent at the time of the decision.
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