People work hard to accumulate assets over their lifetime and it’s critical to properly protect those assets today – and perhaps more importantly – for the future. From our homes to our financial investments, wealth should be carefully protected for future generations and we should plan for the efficient transfer of that wealth. Adding a trust to your estate plan offers many benefits and can be a highly effective vehicle for taking care of the people you love when you’re no longer around or lack the capacity to assist them. When establishing a trust, there are several key considerations for how the trust will work for a grantor (the person establishing the trust), the trustee (the person managing the trust), and beneficiaries (the people benefitting from the trust). In this blog, we take a closer look at the elements of a trust and discuss the benefits of a revocable trust and an irrevocable trust.

What is a Trust?

A trust forms a separate legal entity and fiduciary relationship that enables a person to hold assets for his or her own benefit or the benefit of a third party. The grantor can choose a successor trustee to manage the trust if the grantor becomes incapacitated or dies. However, the trustee must manage the trust within the trust’s established guidelines and according to the grantor’s wishes both during his or her lifetime and after death. There are numerous benefits to having a trust, such as avoiding probate and tax minimization, among others.

Revocable Trusts

With a revocable trust, also referred to as a living trust, the terms of the trust can be changed at any point by the grantor. Examples of changes include removing beneficiaries, changing successor trustees, designating new beneficiaries, and modifying provisions regarding how assets in the trust are to be managed.

The primary benefit of revocable trusts is that assets in the trust bypass probate court, the legal proceeding for distributing property when an individual dies. Probate court can be time-consuming and costly. Bypassing probate ensures the details of the trust remain private and the beneficiaries can more easily receive their designated assets.

The level of flexibility and control over a revocable trust comes with conditions – the assets within are not protected from the grantor’s creditors (although revocable trusts can provide creditor protection for the remaining beneficiaries after the grantor’s death).

Upon the grantor’s death, the assets in the trust are also subject to state and federal estate taxes. However, in some states, including Massachusetts, there are potential tax benefits of using revocable trusts. In particular, each spouse can ensure that he or she is fully utilizing the $1,000,000 Massachusetts exemption.

Irrevocable Trusts

Grantors also have the option to set up an irrevocable trust. The dispositive provisions (the terms regarding who gets what) of irrevocable trusts cannot be modified after its creation without the consent of the beneficiaries and a court decree. In short, the guidelines and terms of this type of trust are set in stone once the legal documents are signed. It is only under extremely rare circumstances that changes are made.

Irrevocable trusts protect the beneficiaries (other than the grantor, if he or she is a beneficiary) from creditors because the assets have been transferred from the owner to the trust and are no longer considered a part of the owner’s estate. Unlike revocable trusts, the assets are also protected from estate tax upon the grantor’s passing. The assets must be transferred from the owner’s name to the trust. This also alleviates the grantor of the burden of income tax responsibility when the assets in the trust generate income.

Like revocable trusts, assets in irrevocable trusts also avoid probate.

Unlike revocable trusts, there are a wide variety of irrevocable trusts, such as: spendthrift trusts, dynasty trusts, special needs trusts, asset protection trusts, generation-skipping transfer trusts, life insurance trusts, and many others. Because of the depth of options and complexity, it is best to reach out to your local expert and ask them to help guide you.

The best way to determine which trusts best fit your estate planning goals is to consult with a reputable trusts and estates attorney. Working with an estate planning attorney who is well-versed in trust strategies and who can work alongside your financial and tax advisors, can help you formulate a plan to protect your assets and leave a lasting financial legacy for your loved ones.

Contact Greg Racki, Director of Estate Planning at Ligris + Associates PC, to learn more about which type of trust is best for you and your family.

Posted In: Articles, Trusts & Estates