What is a Trust? A Trust is a document whereby you (Settlor/Grantor/Trustor) transfer certain property (the trust corpus) to another person or yourself (Trustee) to hold and manage for you. There are many different kinds of trusts that can be created for different purposes, but they boil down to two types of categories – revocable and irrevocable.
Revocable trusts (also called Living Trusts) are used with a Will to direct where a person’s assets should go upon death. They also have the benefit of controlling any property within the trust during a lifetime incapacity without the necessity of a guardianship. When assets are retitled to a revocable trust, those assets will also bypass the probate process because they are not titled in the deceased person’s individual name but in trust name. Many people like the flexibility, privacy, and probate avoidance that revocable trusts provide. However, contrary to popular belief, a revocable trust does not protect the assets from creditors.
Just like a Will, revocable trusts can be revoked or changed during lifetime to suit the person’s changing needs. However, at death, the trust becomes irrevocable and cannot be changed without court approval or the approval of all the beneficiaries and trustee. Therefore, should you decide to use a revocable trust in your estate planning, it is important to make sure it is drafted by a qualified and knowledgeable professional, and reviewed at least every five years. And in order for a revocable trust to work as intended, it is essential that all significant assets be retitled in the name of the trust to minimize probate. A qualified estate planning attorney can help you decide what assets need to be transferred and what assets do not.
Irrevocable trusts are exactly that – irrevocable. Once they are created, they cannot be revoked or easily changed. Most people utilize irrevocable trusts in their estate planning to reduce their estate tax liability at death or provide a certain amount of asset protection to the beneficiaries. If the trust and the transfer of assets to the trust is properly drafted and structured, the assets will not be includable in the person’s estate at death for estate tax purposes. The trust of this type that is most often seen is the irrevocable life insurance trust (i.e. ILIT). For people who have a multi-million dollar life insurance policy, it is often recommended to move it into an ILIT so the proceeds of the policy will not be taxed within the estate. For those people who have a taxable estate and do not have liquidity to pay the tax, a large policy inside an ILIT will provide the funds to pay the estate tax while keeping the policy proceeds out of the taxable estate. For further explanation of how this popular planning technique works, please speak with an estate planning professional qualified to do advanced estate tax planning, or call us.
There are many other irrevocable trusts that can be used for advanced estate tax planning and lifetime gifting. They include residence trusts, annuity trusts, and charitable trusts among others. Irrevocable trusts can also be incorporated into your plan at your death to provide asset protection and management for a surviving spouse or children. If you think that your estate may be taxable at death, or you want your beneficiaries to be protected after your death, please speak with an estate planning attorney to see if irrevocable trust planning is something you should consider.