Trusts are essential to almost any estate plan, and there are many types of trusts. Depending on your needs, you can use a trust to accomplish a variety of essential estate planning goals.
For example, trusts can be used to:
Trusts are flexible and very useful. But they can also be complicated, especially if you haven’t been through the estate planning process before.
A trust is a legal entity that describes a relationship between three or more parties — the person with the assets, their trustee, and any beneficiaries. The structure of a trust allows a third party (the trustee) to manage assets on behalf of one or more beneficiaries.
The person who sets up the trust is called a grantor, trustor, or settlor. To set up a trust, the grantor creates a trust document. This explains the purpose of the trust, appoints a trustee, and clarifies how the trust should work.
Trusts can provide several benefits, depending on the type of trust and how it’s set up. Typically, trusts are used to accomplish one or more of the following estate planning goals:
There are many types of trusts, and it is vital to understand the differences before the maximum benefits of a trust can be realized. A qualified attorney can answer any questions you may have.
A trust set up during the settlor’s lifetime is called a living trust, or inter vivos trust. All living trusts fall into two categories: revocable and irrevocable trusts.
Understanding the differences between the types of trusts is crucial if you want to create a comprehensive estate plan.
The main difference between a revocable living trust and an irrevocable trust is that a revocable trust can be modified during the settlor’s lifetime. In contrast, an irrevocable trust cannot be changed.
A revocable trust may seem like a natural choice, as it provides more flexibility than an irrevocable trust. However, irrevocable trusts offer benefits that revocable trusts don’t provide. So the choice is often more complex than it initially appears.
The grantor can modify or even cancel a revocable trust at any point during their lifetime.
While the grantor is living, all income generated by a trust is distributed to them. Only upon the grantor’s death do the trust’s assets pass on to beneficiaries.
Benefits of a revocable trust
The main purpose of a revocable trust is to avoid probate. Any assets placed in a revocable trust will bypass the probate process and be distributed according to the trust document, rather than the individual’s will.
Unlike probate assets, trust assets can be distributed immediately upon the grantor’s death, resulting in a much simpler transition.
Revocable trusts also can provide families with significant savings in legal fees and court costs, by allowing them to bypass lengthy probate proceedings.
Revocable trusts also make sense if you want to plan for the possibility that you may become incapacitated at some point. Sudden incapacity can wreak havoc on your savings, especially if you haven’t named someone to help preserve and care for your assets.
But if you opt for a revocable trust and become incapacitated, your trustees will be able to step in to take care of the assets without delay. As trustor, you can even provide specific instruction in the event you become incapacitated.
Hence, a revocable trust can give you peace of mind if you have a medical condition with the potential to advance suddenly and leave you incapacitated.
Drawbacks of a revocable trust
The main drawback of revocable trusts is that they do nothing to avoid estate taxes. Thus, revocable trusts make the most sense for those who don’t have an estate tax issue. Since the federal estate tax doesn’t apply to estates worth less than $11.58 million, many families will fit into this category.
Irrevocable trusts may seem to be less attractive because they can’t be changed or ended if your circumstances or wishes change. However, the advantages of an irrevocable trust are significant — and hard to achieve in other ways.
This is because once assets are moved into an irrevocable trust, ownership of the assets transfers from the grantor’s estate to the trust. Removing a trust’s assets from an estate provides many benefits, helping families accomplish a wide range of estate planning goals.
Pros and cons of an irrevocable trust
In this way, an irrevocable trust provides asset protection. Creditors won’t be able to access assets in an irrevocable trust.
Of course, states also have their own tax laws. If you’re considering this strategy, it’s a good idea to consult with a local estate planning attorney for assistance.
That said, if the gift tax rate is lower than the capital gains tax rate, it may still bring tax savings.
Anyone thinking about opening a revocable trust for tax purposes should consult with a dedicated estate planning attorney.
Medicaid benefits can cover the costs of a nursing home or assisted-living facility. But qualifying for Medicaid can be tough because of strict asset and income limits.
However, assets in an irrevocable trust aren’t part of your estate and aren’t counted when applying for Medicaid. So by transferring assets into an irrevocable trust at least five years before you apply for Medicaid, you can avoid spending a big chunk of your assets before you qualify.
On the other hand, if the assets aren’t transferred until after your death, your estate and beneficiaries will receive the charitable estate tax deduction.
Revocable and irrevocable trusts can help you and your family with estate planning maneuvers. However, it can be challenging to decide which type of trust will help most. If you haven’t set up an estate plan or updated your estate plan recently, reach out to a dedicated estate planning law firm for assistance.
When it comes to estate planning, revocable and irrevocable trusts are just two of the many tools available to meet your family’s unique needs.
A last will and testament, life insurance policy, business succession plan, and other elements of an estate plan can all be vital in addressing your family members’ future needs.
If you don’t have an estate plan, or it’s been a few years since you updated yours, reach out to a dedicated trust and estate attorney for assistance.
Most estate planning law firms offer a free consultation to help prospective clients understand what estate planning products may be most helpful. They can also answer any questions about the process.
