When contemplating a trust in your estate plan, it is crucial that you know the differences among the types of trusts you can establish. Trusts, generally put in their most simple form, are established when a Grantor/Settlor/Trustmaker (you) transfers some type of asset to a Trustee to hold and administer the asset for another, named the beneficiary. However, the legal and tax consequences of all trusts are not the same and you must understand their differences.
A Revocable Trust, also known as a Revocable Living Trust, Living Trust or Inter Vivos Trust, is a trust created by the Grantor or Settlor during his or her lifetime, which can be changed at any time. In other words, if after establishing a Revocable Trust, you decide you want to change provisions in the trust or change your beneficiary, or even if you decide you don’t like anything about the trust, you can either revoke the entire agreement or change the contents through a Trust Amendment and Restatement or a Trust Revocation.
Though Revocable Trusts have the benefit of being flexible, they do have downsides. Assets which you fund into a Revocable Trust are still considered your own personal assets for creditor and estate tax purposes. This means that a Revocable Trust offers no protection from people or entities you owe money to. This also means that all of the trust assets will be considered yours for Medicaid planning purposes and all assets held in the name of the trust at the time of your death will be subject to both state and federal estate taxes.
The main reasons why you may want to establish a revocable trust:
- Flexibility: Revocable Trusts allow you to revoke or amend its terms. With a revocable trust, you still own the assets.
- Plan for disability: Assets in a revocable trust at the time the grantor/settlor becomes mentally incapacitated can be managed by their trustee instead of a court-supervised guardian or conservator.
- Avoiding Probate: Assets held in the name of a Revocable Living Trust at the time of a person’s death will pass directly to the beneficiaries named in the trust agreement and outside of the probate process. This means those loved ones you leave your assets to via trust will get those assets quicker and without the need for a formal probate proceeding, which can take years and cost a lot of money in notification and attorney’s fees.
- Privacy: By avoiding probate with a revocable living trust, your trust agreement will remain a private document and avoid becoming a public record for all the world to see and read. This will keep the details about your assets and who you have decided to leave your estate to a private family matter. Contrasted with a regular will that has been admitted to probate – it becomes a public court record that anyone can see and read.
Generally speaking, an Irrevocable Trust is a trust cannot be changed after the agreement is signed, or a Revocable Trust that by its design, becomes irrevocable after the Grantor/Settlor dies or after some other specific point. When you establish an irrevocable trust, you no longer own the asset you conveyed into the trust.
Irrevocable trusts can take on many forms and be used to accomplish a variety of estate planning goals:
- Estate Tax Reduction: Irrevocable trusts are a great way to remove value from a your estate so that the property cannot be taxed when you die. Since you no longer own the assets in an irrevocable trust, it cannot be taxed as part of your estate when you die.
- Asset Protection: Another common use for an irrevocable trust is to provide asset protection for the Grantor and the Grantor’s family. This works in the same way that an Irrevocable Trust can be used to reduce estate taxes – by placing assets into an Irrevocable Trust, the Grantor is giving up complete control over, and access to, the trust assets and, therefore, the trust assets cannot be reached by a creditor of the Trustmaker or an available resource for Medicaid planning. However, the Grantor’s family can be the beneficiaries of the irrevocable trust, thereby still providing the family with financial support, but outside of the reach of creditors.
- Charitable Estate Planning: Another common use of an Irrevocable Trust is to accomplish charitable estate planning, such as through a charitable remainder trust or a charitable lead trust . If the Grantor makes the initial transfer of assets into a charitable trust while still alive, then the Grantor will receive a charitable income tax deduction in the year of the transfer is made. Or, if the initial transfer of assets into a charitable trust doesn’t occur until after the Grantor’s death, then the Grantor’s estate will receive a charitable estate tax deduction.
- Avoiding Capital Gains: There are ways to move assets into the irrevocable trust in such a way that they won’t incur capital gains taxes. That’s not possible with a revocable trust. (Keep in mind, though, that transferring assets through an irrevocable trust may result in gift taxes being owed.)
As with the Revocable Trust, or any estate planning technique, the Irrevocable Trust does have its disadvantages. Among others, the fact that you will lose ownership and control over the asset after the asset is placed in an Irrevocable Trust, if done during your lifetime, can be hard for some to swallow.
Making the Right Choice
Which trust you decide to establish, if a trust at all, is solely determined on your circumstances and what you are trying to accomplish. Some of the questions you might want to ask yourself prior to speaking to a professional about establishing a trust are:
- What parties are you aiming to protect with the trust?
- What circumstances are you preparing for in creating the trust?
- What property assets will be involved in the trust and what is their total value?
- What tax implications are important to you?
To discuss this decision with an experienced attorney, request a free consultation with Attorney Travis J. DeCosta today.
***This article/blog is intended to give a general, surface-level understanding of its subject(s) and should not be used as legal advice. Before making any legal decision, it is best to speak with a professional about all your circumstances and the particulars which matter to you most, as there are many different options, legal and tax benefits and consequences, and exceptions, which are not mentioned herein.