By Shirley Farmer, AAL
The information provided in this article is intended to give a general overview of the topic and is not intended as legal advice. For information specific to your situation, please talk with your estate planning professional.
TRUST … IN YOUR ESTATE PLAN
In this edition we are taking a broad look at a hot topic in estate planning – Trusts. We hear the term a lot, but what exacting is a “Trust,” and what are some pros and cons of having one? In general, a Trust is an agreement by which a person identified in the Trust document as a “Trustee” manages specified assets for the benefit of the chosen beneficiaries of the Trust. While there are many types of Trusts and options available to tailor them, there are two main categories: Irrevocable Trusts and Revocable Trusts.
Irrevocable Trust: When you form an Irrevocable Trust, the assets (house, personal property, money, etc) that you put into the Trust are no longer yours. The Trust has a kind of existence all its own, and the assets you put in are gifts to the Trust and become property of the Trust and ultimately the beneficiaries. Though there are exceptions to every rule, once you put an asset into an Irrevocable Trust, you generally can’t get it back. This can be useful if you want to ensure that certain assets are not included in your estate for tax or liability purposes and you want to make the gift of those assets during your lifetime. However, when considering an Irrevocable Trust, it is important to also consider whether you may need those assets at some point in the future. For example, if you put a large amount of assets into an Irrevocable Trust then suffered a major illness and needed those funds for your own use, you may well be out of luck. For Trusts, “Irrevocable” means that once it’s done you don’t get to take it back, so you’ll make certain this is what you want to do before creating an Irrevocable Trust.
Revocable Trust: A Revocable Trust is often called a “living trust.” Similar to an Irrevocable Trust, when you form a Revocable Trust the assets you put into the Trust are retitled to the name of the Trust; however, as this form of Trust is “revocable,” you can change your mind at any time and have the authority to remove items from the Trust or terminate it altogether during your lifetime. This gives you more control over your assets while you are alive. The Revocable Trust allows you to name yourself as primary Trustee to manage the Trust, but you also get to choose who you want to take over the management of the Trust when you are not able to. So if you become incapacitated, the Trust carries on and it is clear who will manage the assets and the Trust for you.
A Revocable Trust outlines who you want to inherit specified assets upon your death, and because you can change it during your lifetime it is similar to a Will. A major difference with a Will, however, is that upon your death the assets in the Trust will pass directly to the named beneficiary without having to go through the probate process. This saves time and money for your beneficiaries. Having a Trust can offer you more privacy as well. When a Will is put through probate a copy becomes part of a public record, but a Trust generally remains private so information about your assets, personal wishes and instructions do not end up available to just anyone who wants to know.
Though there are many benefits, there are also disadvantages, and a Trust may not be right for everyone. A Trust may save time and money for your beneficiaries upon your death, but it is more costly to create and maintain during your lifetime. Along with the cost of paying an attorney to create the Trust, all the property to be put into the Trust has to be retitled into the name of the Trust, such as the deed to your house, how accounts are listed, etc. Additional record keeping is required while the Trust exists, and you have to be careful when you acquire new assets that things you want in the Trust are properly identified.
It is important to note that just having a Trust does not necessarily mean you avoid probate altogether, and you still need to have a Will that works together with your Trust. Also, since the assets placed in a Revocable Trust are still yours and can be added or removed at any time you choose, this type of Trust does not provide security that the assets can’t be reached by creditors should you find yourself in financial difficulty or get sued. The assets in a Revocable Trust are still yours and will also still be counted when looking at things like Medicaid options and for the various estate taxes that may be applicable upon your death.
A Trust can be an important piece of a well-crafted estate plan, and whether you have a Revocable or Irrevocable Trust makes a big difference in your future ownership of and access to the Trust assets as well as the consequences of estate and gift taxes. These topics will be discussed in more detail in future editions, but be sure to talk with your estate planning professional about your options and tax concerns when choosing which Trust is right for you and your loved ones.
We’ve now covered an overview of Wills (September edition) and Trusts – check out future editions for more in depth information on these topics and more, and see our November edition for an overview of Power of Attorney documents!
Shirley D Farmer, Attorney