When it comes time to plan for death or incapacity, estate planning is vital. There are various estate planning tools, including wills and trusts, which are available to help create the comprehensive estate plan you need. Planning for your future and the future of your family is important, as it allows you to determine who your heirs should be and to reduce the unnecessary expenses that sometimes accompany inheritance and probate. If you decide to include trusts in your estate plan, you should know that there are several different types of trusts available.
First, the advantages of creating a trust
There are many advantages in creating a trust as part of your estate plan. Trusts are valuable because they help avoid probate and, depending on the type of trust, they can provide asset protection. A trust is basically a fiduciary agreement between the trustee and the grantor, which means it is an agreement based on confidence and trust. The trustee is given the power to obtain and manage all of your trust assets on behalf of your chosen beneficiaries. The trust agreement should also provide detailed instructions as to the management and distribution of your estate.
Revocable trusts versus irrevocable trusts
Although there are many different types of trusts, they all fall into one of two categories: revocable and irrevocable. This distinction is very important. A revocable trust allows the person creating the trust (the grantor) to modify the terms of the trust. As the name implies, you can revoke, or cancel, a revocable trust at any time before your death. However, after your death, the trust will typically become irrevocable.
How an irrevocable trust is different from a revocable trust
By definition, an irrevocable trust is different because it cannot be modified after it has been executed. Nevertheless, there are very favorable tax consequences inherent in irrevocable trusts. For example, once your assets have been transferred to an irrevocable trust, they are essentially out of reach from creditors, estate taxes, and probate. So, while you lose some control of your assets, you gain many other benefits.
An irrevocable trust provides the best asset protection
In order for a trust to be truly effective at protecting assets, it needs to be of the irrevocable variety. “Irrevocable” means the trust cannot be modified after it has been created. The reason it works is that you essentially no longer control the property and, because it cannot be changed or revoked, you cannot get the property back. Therefore, the property is no longer subject to legal claims against you.
Why many people choose living trusts
Most clients choose to create a living trust because they are seeking to avoid the time and expense of the probate process. Every state establishes its own probate laws which govern the probate administration of an estate. Another benefit of living trusts is that in the event you become incapacitated, your “successor trustee” can step in and manage all of the trust assets automatically. Your successor trustee is the person you identify in your trust agreement to take over the trust upon your death. A provision regarding incapacity can prove very helpful if the need ever arises.
What exactly is a living trust?
A “living trust” is a specific type of trust that becomes effective while you are still living, as opposed to being created through your will after your death. As with any other type of trust, the trust property will be managed by controlled by the trustee, and then distributed to your beneficiaries upon your death. With a living trust, however, you can name yourself as trustee while you are alive. A successor trustee will then take over after your death.
A living trust is entirely different from a last will and testament
Although a will and a living trust both provide for the distribution of assets, they are not the same type of estate planning instrument. A will basically provides a plan for the distribution of your assets to your designated beneficiaries after your death. A living trust, though, places your assets into a trust for your benefit during your lifetime, and then transfer them to your beneficiaries after your death.
Download our FREE estate planning worksheet! If you have questions regarding types of trusts, or any other estate planning needs, please contact The Vermillion Law Firm, LLC for a consultation either online or by calling us toll free at (888) 567-5745.