Trusts offer several advantages in terms of estate planning:
- Control Over the Distribution of Wealth – The trust agreement can include specific terms that precisely control when and to whom your wealth is distributed after you pass away.
- Probate Avoidance and Privacy - Probate is a public process. A trust can enable your assets to bypass probate and your affairs to remain private. This is in addition to saving your estate money that would otherwise be lost to probate court costs and attorney fees.
- Asset Protection - A properly created trust can help you protect the assets distributed from your estate from being lost to your heirs' creditors.
- Incapacity Planning - A trust not only allows you to plan for what happens to your estate after you pass away, it also allows you to plan for periods of incapacity during your lifetime.
Other Reasons to Use a Trust:
- To manage money for a spendthrift heir;
- To provide income for minor children and heirs with special needs;
- To facilitate inheritances for a blended family;
- To protect assets from being lost in a divorce; and
- To give to charitable organizations.
There are many types of trusts that can provide financial advantages for you and your family. Some offer control of how and when your assets will be distributed to your heirs. Others create tax efficiency by positioning assets outside your taxable estate.
Revocable, Irrevocable, Inter Vivos, and Testamentary Trusts
A trust can be categorized as either revocable or irrevocable. A Revocable Trust is a trust that can be altered or revoked entirely while the Grantor is living, and is the most common type of trust used for estate planning purposes. An Irrevocable Trust is one that cannot ordinarily be altered or revoked, except by court order. All Revocable Trusts become Irrevocable upon the Grantor’s death.
A trust can also be categorized as either an Inter Vivos Trust or Testamentary Trust. An Inter Vivos Trust (Living Trust) is one that is created and operative during the Grantor’s lifetime. A Testamentary Trust is one that is created through the Grantor’s Last Will and Testament and only becomes operative upon the Grantor’s death.
Other Common Types of Trusts
- Spendthrift Trusts – used to prevent the Beneficiary from selling or pledging away interests in the trust until such time as the trust property is distributed out of the trust and given to the beneficiary;
- Special Needs Trusts - used to provide income to disabled beneficiaries, without jeopardizing their eligibility for public benefits, such as Social Security Income, Medicare, and Medicaid;
- Irrevocable Life Insurance Trusts (ILIT) - used to hold term or permanent life insurance policies during the insured’s lifetime, then to manage the distribution of the life insurance proceeds after the insured's death;
- Marital Trusts - used to avoid probate and pass assets to a surviving spouse, defer estate tax on those assets until the surviving spouse passes away, and protect the assets from the surviving spouse’s creditors;
- Asset Protection Trusts - used to hold an individual's assets in order to protect them from lawsuits and creditor claims; and
- Charitable Trusts - used by individuals to enjoy an income stream, while reducing their taxable income, and donating to charity.
A trust is the most common estate planning document because it can accomplish so many estate planning goals. But not everyone needs a trust, and some need a trust more than others.
Here are some questions and circumstances you should consider when deciding if you need a trust:
- Is your estate worth more than $100,000?
- Do you own real estate in more than one state?
- Do you have children from a previous marriage?
- If your child passes away, do you want to ensure that your grandchildren inherit your assets, rather than your child's spouse?
- Do you want to protect a beneficiary's inheritance from creditors or divorce?
- Do you want to avoid court involvement if you become incapacitated and need someone to step in and manage your affairs?
If the answer to any of the questions above is yes, then you may benefit greatly from having a trust to manage and direct the distribution of your estate, avoid probate, and minimize estate and gift taxes.
On the other hand, if you don’t own much property, are not married, and/or if most of your wealth is in assets like insurance policies, annuities, retirement plans, and jointly held property that are not subject to probate, then you may not need a trust at all.
To learn more about the different types of trusts, and for help deciding if you need a trust, contact a qualified estate planning attorney for a free case evaluation.