Trusts are an essential part of a comprehensive estate plan and offer a number of advantages, including possible tax benefits and avoidance of probate. There are two main types of trusts that a Worcester estate planning attorney will discuss with you: revocable and irrevocable. Understanding the differences between them will help you plan your estate and provide for your family. The Estates & Trusts attorneys of SederLaw are ready to assist.
The Basics Of Estate Trusts
A trust is a legal instrument by which one party (known as the grantor) gives property and assets to another party (the trustee), who is responsible for managing that property for the benefit of a third party (the beneficiary) in accordance with the terms of the trust. Trustees act in the capacity of a fiduciary, who is required to put the interests of others ahead of their own by observing certain duties (such as good faith and loyalty).
Trusts are a key component in any sound estate plan, and they are not just for the wealthy. Generally, trusts can be used to accomplish the following objectives:
- Provide for minor children by allowing distributions of trust assets to meet their needs. These distributions often take place as the child reaches certain ages or other milestones.
- Provide for the needs of children who have special considerations, such as exceptional medical issues, problems with money management, or a drug addiction. The trustee is granted broad discretion in how and under what circumstances trust assets are distributed.
- Avoid the costly and time-consuming process of probate. Estates must generally be submitted to a court-supervised procedure known as probate, but trusts can bypass this step.
- Allow for more privacy as compared to a will. When someone with a last will and testament dies, the will is filed in court and becomes public. Trusts protect the privacy of family assets.
- Reduce the impact of estate taxes. Although trusts do not avoid estate taxes altogether, they may lessen the effects of those taxes when drafted and executed properly.
What Are Revocable Trusts?
Also known as living trusts and inter vivos trusts, revocable trusts can – as the name implies – be revoked at any point during the grantor’s lifetime. The grantor can also amend the terms of a revocable trust or add assets to it. Assets that are transferred to a revocable trust can still be accessed and used by the grantor, just as if those assets were still titled in the grantor’s personal name.
The primary benefit of the revocable trust is, therefore, that the grantor retains control over it and over the trust assets. The trustee, who is often the grantor himself, can handle the trust assets as he or she sees fit. This allows for assets to be more easily managed in the event the grantor becomes incapacitated.
When life changes occur, such as remarriage, the grantor can modify the trust by (for example) adding his or her stepchildren as trust beneficiaries. After the death of the grantor, the trust will usually become irrevocable and the assets will pass to the beneficiaries.
There are some disadvantages to revocable trusts. For example, they do not protect assets from certain creditors. Assets held by the revocable trust will be treated as if they are owned by the individual grantor. Also, while trusts generally offer tax advantages, there are no immediate tax benefits with a revocable trust. Moving assets into a revocable trust won’t avoid income or estate taxes.
What Are Irrevocable Trusts?
Once an irrevocable trust is created, it cannot be changed by the grantor. While the grantor can still retain some control over trust assets (for example, by selecting a close friend or family member as the trustee), the irrevocable trust cannot be revoked nor can the terms be changed. The trustee is granted considerable authority to manage the trust in accordance with the terms. These types of trusts are commonly used to provide for legacy gifts to the grantor’s children and grandchildren.
Compared to revocable trusts, irrevocable trusts offer significant protections for the grantor’s assets. That’s because those assets are considered to be owned by the trust rather than the individual grantor. An irrevocable trust, therefore, provides protection against creditor claims and lawsuits. They also offer potential healthcare benefits. If the grantor transfers assets into an irrevocable trust at least five years before applying for MassHealth benefits, they won’t be considered in determining the grantor’s eligibility.
As with revocable trusts, there are drawbacks to irrevocable trusts. Because they cannot be dissolved or altered, they are much less flexible. The grantor will be required to cede significant control to the trustee to handle those assets. This limits the grantor’s ability to adapt to certain life changes such as remarriage or incapacity. Finally, a separate tax return has to be filed for the trust.
Our Worcester Estates & Trusts Attorneys Can Help
Designing an estate plan requires careful consideration of the pros and cons of both revocable and irrevocable trusts. There are also other factors to weigh, such as which assets to include in the trust and who to select as a trustee. To answer these and other critical questions, you need a dedicated attorney who will consider your individual and family goals and then get to work executing a plan that meets them. You can count on SederLaw. Contact us today to schedule your consultation.