Estate planning is an essential aspect of managing your life and assets both during and after your life. Wills are traditionally known to be the primary estate planning tool, and for some people they are sufficient. In our previous blog, “Understanding Wills: The Basics” we talked about asset distribution, executors, and other factors to consider with a will. Trusts, however, are versatile companions or alternatives to a will that offer flexibility and advantages that make them ideal in many circumstances. This blog will provide an overview of what a trust is and how it might be useful for your estate planning needs.
Trusts can be structured to promote a wide range of goals, making them highly adaptable to your specific needs. Whether you want to provide for your loved ones, support charitable causes, protect assets from creditors, plan for taxes, control the distribution of your assets in detail, or manage complex family dynamics, there is likely a trust that can help you achieve your objectives.
While there are many different trust subtypes, they all primarily fall under one of two categories: revocable trusts (sometimes called inter vivos trusts or living trusts) and irrevocable trusts.
What is a Revocable Trust?
Revocable trusts offer a unique blend of control and flexibility. A revocable trust is created by a grantor (the trust’s creator) who transfers assets to the trust to be managed by the trust’s trustee. During the grantor’s lifetime, the grantor often serves as the trust’s initial trustee and retains full control to amend or revoke the trust at any time. The grantor typically also serves as the trust’s initial beneficiary, so the trust’s assets are managed for his or her benefit and use during the grantor’s lifetime.
Upon the grantor’s passing, the trust becomes irrevocable, and the appointed successor trustee takes over the management of assets and distribution to the designated beneficiaries according to the terms and instructions outlined in the trust document.
A revocable trust may be selected as a primary planning tool over a will because revocable trusts offer several benefits not offered by wills. These benefits include:
- Probate Avoidance: Assets held in a revocable trust can be distributed to beneficiaries without going through probate, ensuring a more seamless and private transfer.
- Privacy: Related to probate avoidance, revocable trusts provide a higher level of privacy since they do not become part of the public record during probate.
- Management During Incapacity: A revocable trust allows for the seamless management of your assets should you become incapacitated, as the appointed successor trustee can readily step in and handle your affairs as needed.
- Control: Both during your life if you become incapacitated and after your death, a revocable trust allows you to control the distribution of your assets. For example, you can direct the trustee to distribute assets to young-adult beneficiaries in phases as they reach specified ages or for specific uses (for example, education or purchasing a home).
What is a Irrevocable Trust?
Irrevocable trusts, as the name suggests, cannot be easily amended or revoked once created. These trusts are created by a grantor who transfers assets into the trust, appoints a third-party trustee, and relinquishes control over the transferred assets. While a well-drafted trust will still instruct the trustee to use the assets for the grantor’s benefits, the grantor loses the right to make changes to, remove items from, or revoke the trust without the consent of the beneficiaries. As control over something is legally viewed as a vital element of possession, items properly transferred into your trust are not considered part of your countable estate.
This function of irrevocable trusts makes them ideal tools for long-term planning and various purposes, such as:
- Asset Protection: Assets held in an irrevocable trust are generally shielded from creditors and legal claims against the grantor or beneficiary because the items in the trust are not under their control and are therefore not viewed as their technical possessions.
- Eligibility Protection: Irrevocable trusts can be structured to protect eligibility for government benefits such as Medicaid. By transferring assets into an irrevocable trust, individuals can remove their wealth from their countable estate in order to meet income and wealth eligibility criteria for programs like long-term care assistance. This allows grantors to preserve their assets for their beneficiaries when they would otherwise be used to reimburse the state.
- Estate Tax Planning: Irrevocable trusts can help reduce estate taxes and preserve more of your wealth for your chosen beneficiaries.
Which Trust is Right for Me?
For simpler estates and circumstances, revocable trusts are an alternative to wills. However, because the grantor retains control over the assets in the trust, revocable trusts don’t remove any items from the grantor’s countable estate. This means that revocable trusts might not be the right solution for you if you are seeking asset protection, protection from creditors, or eligibility retention. For these more complex objectives, you will want an irrevocable trust. The lawyers at Skufca Law can work with you to determine which path is right for you.
Selecting a Trustee
The trustee plays a central role in managing trust assets and ensuring your wishes are carried out. Choosing the right trustee is a crucial decision when establishing a trust. Aspects to consider in this selection process include:
- Fiduciary Duties: Trustees have a fiduciary duty to act in the best interests of the beneficiaries, managing assets prudently and impartially. It’s vital for your trustee to understand that this is not simply a requirement that the trustee “tries their best.” Instead, the trustee must exhibit skill and diligence in managing the assets. This includes properly investing and cultivating the trust’s assets or otherwise taking care to hire such competent professionals.
- Roles & Responsibilities: Trustees handle administrative tasks, investment decisions, and distributions to beneficiaries, among other responsibilities.
- Professional Trustees: While individuals often look to their closest adult friend or family member to serve as trustee, in some cases, individuals choose professional trustees, such as banks or trust companies, to ensure expertise, objectivity, and continuity in trust management.
Funding the Trust
Funding a trust involves transferring assets into the trust’s name, which is critical to realizing the trust’s benefits. While many assets can be placed in a trust, some cannot. Typical assets to fund into a trust include:
- Real Estate (residential homes, rental properties, and vacation homes)
- Investment Accounts (stocks, bonds, and other investment holdings)
- Bank Accounts (savings and checking accounts)
- Personal Property (personal assets like art, jewelry, cars, and collectibles)
Once you select the items that will fund the trust, you must take care to transfer the items by the appropriate means—it is not sufficient to simply name the items in your trust documents. This means you must appropriately re-title real estate, change the name on accounts, and execute other appropriate assignments. Determining which of your assets to include in a trust and what legal changes or retitling is required is a process our Skufca Law attorneys can assist with.
Assets that typically cannot be placed in a trust include certain retirement accounts and life insurance policies, although these assets can still be coordinated with your estate plan.
Conclusion
Contact Skufca Law today at (704) 376-3030 to discuss your estate planning needs and determine whether a trust is right for you, starting with a free 15-minute wills and trusts consultation.
Coming up next: Stay tuned for our next blog in our Estate Planning Series where we will discuss the different types of irrevocable trusts and how they operate.