Building Blocks of Trusts: What should you know?

By: Daniela Alonso


Trusts come in different forms and can be used to achieve different goals.



What is a Revocable Trust?


A revocable trust is a document (the “trust agreement”) created by you to manage your assets during your lifetime and distribute the remaining assets after your death. The person who creates a trust is called the “grantor”. The person responsible for the management of the trust assets is the “trustee.” You can serve as trustee, or appoint another person, bank or trust company to serve as your trustee. The trust is “revocable” because it can be modified or terminated during your lifetime, as long as you are not incapacitated. A single person’s revocable trust becomes irrevocable upon their death. A joint revocable trust where a couple are co-grantors is sometimes irrevocable upon the death of the first grantor, and sometimes remains revocable until the death of the second grantor, depending on the grantor’s wishes, goals, whether there are children from a first marriage, and other factors to be discussed with your attorney.


A revocable trust can be thought of as a “will substitute”. It designates the person in charge and it names your beneficiaries upon death. Typically a person with a revocable trust will also have a different sort of will, called a “pourover” will that distributes items of tangible personal property and then pours over anything that may have been left out of the trust to the trust. Trust funding is important, so that probate administration may be avoided if at all possible.


What is an Irrevocable Trust?


A type of trust that cannot be amended or terminated without permission of the grantor’s beneficiaries. In this case, the grantor transfers ownership of their assets to the trust thereby legally removing their right of ownership to these assets. An irrevocable trust may have certain tax advantages if the grantor has a large estate. An irrevocable trust may sometimes be used to protect the grantor from being taken advantage of by outsiders. Whether or not to create an irrevocable trust is a complex decision that should be decided together with a knowledgeable estate planning attorney.


How do revocable trusts differ from a wills?


Both revocable trusts and wills are part of estate planning. However, they do have some key differences:

  • Fees to prepare a revocable trust is usually more expensive than a will. This is because there are additional steps to fund a trust and also because there will still be the need for a pourover will to go with the trust. However, there is a significant future cost saving due to probate avoidance.

  • A living trust should provide a smoother transition of ownership of property than a will can. A fully funded trust is an excellent way to avoid probate, which is a cost savings and a time saver for the beneficiaries.


When can a trust go into effect?

  • Before death

  • After death

  • In case of incapacitation


This is another area where trusts differ from wills because wills only go into effect after death.


What are the Benefits of a Trust?


1. A trust can help avoid the probate process.

  • Avoiding probate can lead to a quicker and simpler way of distributing assets. With avoiding probate comes greater privacy. While a will goes into public record, a trust remains private. This is a great option if you would like to keep your finances out of view from the public.

  • Only assets that have been put in the name of the trust will be protected from going to through probate. All other assets not in the name if the trust are still subject to probate unless the assets are jointly owned with survivorship or have a beneficiary designation.

  • While probate may be a great option for some, others may prefer to avoid it and a trust is a great way of achieving that goal.


2. Trusts can provide tax benefits

  • Only if certain conditions are met in an irrevocable trust may assets in the trust be sheltered from estate tax after death. Further, trusts can help minimize gift taxes.

  • Some trusts provide asset protection. A revocable trust does not provide additional asset protection unless the trust will continue to hold assets in trust for the benefit of named beneficiaries after the death of the grantor. During this period that the trust is irrevocable, the trust assets are protected from the creditors of the beneficiaries.


3. Trusts give the grantors more control over how assets are used after their death

  • Trusts can include age attainment provisions and you may designate how you would like the money to be used.

  • The flexibility of a revocable trust also allows for these specifics to be changed at any time. Therefore, if you would like to add other uses or change age attainment provisions after first entering in the agreement, you may do so with a trust amendment.

4. Beneficial in the case of illness

  • A revocable trust can go into effect after incapacitation, at which time the successor trustee steps forward to manage the assets in trust for the grantor’s benefit.


Who should get a trust?


Due to the nature and cost of opening a trust it may not be the best option unless you have a certain amount of assets.


“You don’t have to be a Rockefeller to need a trust.” – CNN Money


Trusts are generally a wise choice for people with a net worth of at least $100,000 and who have a substantial amount of assets in real estate, especially if they own real estate in more than one state.



Sources:

https://money.cnn.com/retirement/guide/estateplanning_trusts.moneymag/index4.htm

https://www.floridabar.org/public/consumer/pamphlet028/

https://www.investopedia.com/terms/i/irrevocabletrust.asp

https://www.forbes.com/sites/bobcarlson/2019/08/28/wills-vs-trusts-which-is-best-for-you/?sh=7f7a947d7abd