What is a Trust?
A Trust is essentially a contract. There are typically three “parties” to this contract. There is the Grantor, or giver. This is the person that puts money into the Trust. There is the Trustee. This is the person who manages the assets in the Trust. There is also a Beneficiary. This is the person who receives distributions from the Trustee, in accordance with the Terms of the Trust. Trusts can be Revocable or Irrevocable.
What is a Revocable Trust?
A revocable trust is a type of contract that can be changed at any time during the grantor’s lifetime. A revocable trust generally becomes irrevocable at the grantor’s death. Note that in certain situations it may be possible to “decant” the trust after death. This would depend on the amount of discretion afforded the trustee. Click here for more information on decanting.
A grantor can create a revocable trust where they maintain full control and unfettered access to their funds during their lifetime and then provide who will receive the contents of that trust at death, along with the way in which the intended recipients will receive those contents. For this reason, a Revocable Trust, or an inter-vivos Trust, is often used interchangeably with a Will.
For example – Jane creates a Trust and puts her house, cash, stocks, and mutual funds into the trust. Page 4 of Jane’s trust provides that while Jane is alive, she continues to write all checks and manage the property. Page 5 of Jane’s trust provides instructions for what happens after Jane’s death. Jane wanted to make sure that her kids didn’t just blow through the money so her trust provided that at death, Jane’s assets continue to be held in further trust with certain annual distributions to her kids for their lifetime.
A revocable trust offers no tax benefits. It does not reduce income taxes, estate taxes, gift taxes, or generation skipping taxes. Similarly, a transfer to a revocable trust bears no tax consequences. Although you are legally transferring assets to a revocable trust, there is no beneficial change of ownership because the grantor/trustee/beneficiary typically retains full control of all assets during lifetime.
When should I consider a Revocable Trust?
Here are a few examples, which are further flushed out here:
- When you have volatile investments and are concerned that those investments may decline in value during the time that it will take your nominated Executor to obtain Letters Testamentary from the Surrogate’s Court.
- When you want to avoid probate for whatever reason (e.g. complicated family tree, unknown family tree, cousins as closest known family, desire to avoid disputes and estate litigation, desire to keep your affairs private, heard that probate takes forever)
- When you want to streamline asset management for your successor trustee, especially if your health is declining)
- When you want help managing your property during life time (e.g. appoint a co-trustee or co-trustees to act immediately with you)
What is an Irrevocable Trust?
An Irrevocable Trust is typically used when an individual wants to remove assets from his/her estate but simultaneously does not want to give unfettered control of the assets directly to the beneficiaries. There are many reasons for removing assets from one’s estate. These reasons could be: estate planning, tax planning, asset protection, creditor protection, medicaid planning, or taking advantage of the annual gift tax exclusion / lifetime gifting exemption. There are many different types of irrevocable trusts in the estate planner’s arsenal, which can be deployed to effectuate the grantor’s intent.
When should I consider an irrevocable trust?
Here are a few examples:
- If a person is interested in Medicaid planning, then the typical trust used for this purpose is known as a Medicaid Qualifying Trust, or an Irrevocable Income Only Medicaid Trust.
- If a person wants to purchase life insurance and have that life insurance be used to satisfy any estate tax obligations and not be includable in their gross estate at their death, then the typical trust for this purpose is known as the Irrevocable Life Insurance Trust.
- If a person wants to engage in estate freezes, where the goal is to transfer portions of an asset and let the asset appreciate outside of that person’s estate, then some of the trusts that can be used for this purpose are known as Qualified Personal Residence Trust or Grantor Retained Trust.
- If a person wants to split interests between two parties, where a portion of the gift goes to one (for example, a Charity), and the balance to a family member, then the trust that can be used for this purpose is a Charitable Lead Trust or a Charitable Remainder Trust.
Can I be the Trustee of my Irrevocable Trust?
The short answer is no. Typically, the purpose of creating an irrevocable trust is to move assets out of your name/estate. If you are the trustee, then you are retaining control of these assets. If you maintain control, then you have not moved the assets out of your name. You have to weigh the amount of control you are willing to give up with the amount of protection / estate freeze that you are able to achieve.
We strive to provide you with a customized plan to fit your individual needs. Please Contact Us to discuss your Estate Planning goals.