What is a trust? A trust exists when a property interest is held by a trustee at the request of the property owner, the settlor, for the benefit of a beneficiary. The written trust agreement provides directions to the trustee regarding how the property is to be managed and distributed. The law requires trustees to meet various fiduciary responsibilities with respect to trust administration. The flexibility of a trust and its terms is nearly endless; which makes it a preferred planning tool that allows the settlor the flexibility to impose some level of control on how trust property is managed. Individuals choose to create trusts for a variety of reasons including management of property for probate avoidance, privacy, tax reasons, and many other reasons. The bottom line is that the trust will be administered according to its terms, and the settlor dictates its terms, which makes a trust one of the most flexible tools available to a client’s estate plan.
Types of trusts. Trusts used in estate planning are either inter vivos trusts, established during the settlor’s life, or testamentary trusts, which are established at death through a will.
Revocable and irrevocable trusts. A revocable trust is a trust in which the settlor retains the right to terminate the trust and reclaim the assets. An irrevocable trust is a trust in which the settlor does not retain the right to terminate the trust and reclaim its assets. A revocable trust created during life, sometimes called a living trust, is one of the most widely used estate planning tools because it provides tremendous flexibility while maintaining probate avoidance. A revocable trust can be a joint revocable trust, where spouses create one trust together rather than separate individual revocable trusts. Revocable trusts become irrevocable upon the death of the settlor and in a joint trust scenario, it is common for part of the trust becomes irrevocable and part of the trust remains revocable.
From a tax perspective, transferring assets to a revocable trust, contrary to popular belief does provide federal income or estate tax advantages to the settlor. This is because the IRS considers this type of trust to be “disregarded” as a separate entity from the settlor; therefore, anything happening at the trust level is considered by the IRS to be happening to the settlor as an individual. At death, all assets held by a revocable trust are considered to be in the estate of the settlor. Similarly, revocable trusts do not generally provide creditor protection or protection against a spouse claiming an elective share of estate assets of a deceased spouse.
Most revocable trusts are designed to receive and dispose of assets at a settlor’s death. The pour over will of the settlor will transfer assets to the trust upon the death of the settlor. Additionally, beneficiary designations on life insurance and similar accounts may provide for assets to be distributed to the trust at the death of the owner.
Why not use a testamentary trust and save the expense of creating a separate revocable living trust?
- Expense and time. Testamentary trusts can require significant court involvement and supervision, which takes time and expense. A revocable living trust may be administered immediately by the successor trustee without court supervision, upon the death of the settlor.
- PRIVACY. A testamentary trust is contained in a will, and a will is a public record. Most settlors, and survivors, prefer to keep sensitive family matters PRIVATE. A revocable living trust is a private instrument and when used in conjunction with a pour-over will, nearly all details of one’s estate and the disposition of its property is kept private. Depending on state law, even certain details of a trust’s terms may be kept confidential from beneficiaries if desired.
- Consolidated plan outside of probate. A revocable living trust can provide a consolidated plan of how to dispose of a settlor’s probate and nonprobate property if the trust is named as the beneficiary of this property. While the terms of a testamentary trust can deliver the consolidated plan for all property, it will likely subject the probate and nonprobate property to the expense, delay, and publicity of probate.
Other trusts. The amount of trusts available to estate planners and settlors is nearly endless; however, below is a list of trusts that are not as common as revocable trust, but in any case are frequently used in conjunction with a revocable trust as part of a comprehensive estate plan. Because of the fact intensive (including tax) analysis involved with most if not all of these trusts, if any of these trusts are of interest to you, please reach out to our office to discuss the specifics of your situation.
- Irrevocable life insurance trust (ILIT)
- Qualified personal residence trust
- Grantor retained annuity trust (GRAT)
- Grantor retained unitrust (GRUT)
- Charitable remainder trusts
- Charitable remainder unitrust (CRUT)
- Charitable remainder annuity trust (CRAT)
- Charitable lead trust (CLT)
- Grantor trusts and intentionally defective grantor trusts