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Common types of trusts
There are many types of trust structures for different purposes depending on the Settlor’s needs and intentions such as privacy, probate, and asset protection. Today, we will discuss three common types of trust structures:
Revocable Trust (Living Trust)
A revocable trust is also known as a living trust or inter vivos trust. It can be amended, modified or revoked by the settlor at any time after it is created. Flexibility is the best description to a revocable trust. Although this type of trust gives the settlor room to change his mind, it is less effective in terms of asset protection. However, the settlor can change a revocable trust to an irrevocable trust at any time.
Contrary to a revocable trust, an irrevocable trust cannot be revoked after the trust has been created without the consent of the beneficiaries. The beneficiaries’ interests under an irrevocable trust are more secure. Moreover, it can protect your assets from creditors’ claims and therefore asset protection is more effective. Irrevocable trusts are often used as a vehicle to facilitate advanced tax planning and gifting for one’s estate.
A discretionary trust is an arrangement for the trustee to handle the investment and distribution of trust assets at his discretion. The settlor has a letter of wishes stating who the beneficiaries of the trust are, the distribution ratio of the beneficiaries, and the direction of investment. The trustee usually refers to his wishes and has the discretion to deal with the distribution. For example, if the inflation is high, the beneficiary requires a little more living expenses. The trustee can choose to increase the distribution reasonably for the beneficiary. However, the letter of wishes is for reference only. The trustee has no legal responsibility to manage the assets according to his wishes.