Establishing a trust allows you the opportunity to engage in more in-depth planning. Trusts are advantageous for several reasons, including the ability to avoid the cost, time and public notoriety of the probate process. You will be able to implement distribution strategies that fit your particular situation and family structure. Executing a trust allows you to make decisions now about who will handle your affairs under the trust after you are gone, including the collection and distribution of your assets in accordance with the trust and payment of inheritance tax.
There are several types of Trusts you can utilize in an Estate Plan. And trust us, there is a difference between the different types. Trusts are an effective Estate Planning tool for a variety of clients, depending on the Estate Planning goals you are trying to meet. It is helpful to understand the basics surrounding the three most common types of trusts:
A Testamentary Trust is a Trust that is outlined within your Will (the “testament” that you make in your Will). When you die, your personal representative of your estate will establish the Trust based on the guidelines you set out in your Will. Then the Trust is funded with the assets that you have specified in your Estate Plan. This type of Trust must go through the probate process in order to be set up. The Trust “springs” into action upon the triggering event – your death. Up until the time of your death, this type of Trust is revocable and modifiable so long as you are competent (and alive). This type of Trust is common for parents who are wanting to set out parameters for how estate assets, life insurance and other assets will be used for the benefit of their minor children in the event of their early death.
Unlike a testamentary trust, a Living Trust is established while you are alive. During your lifetime, you are the “trustee” (the person in charge of the Trust). The Living Trust shares your social security number and you, as the grantor, will maintain control over the assets that are in the Trust. You are free to title assets in the name of the Trust and/or remove assets from the Trust at any time while you are living and competent. Think of the Living Trust like a bucket. You create the bucket through completing the Trust document and then you put stuff in the bucket (“funding” the Trust). Assets that are correctly titled in the name of a Living Trust avoid the probate process – a key difference between a Testamentary Trust and a Living Trust. If you correctly fund a Living Trust, at the time of your death, your estate can avoid the probate process. The successor trustee, following your death, simply administers the Trust according to the terms you set out.
An Irrevocable Trust, like its name implies, is a Trust that once set up, cannot be changed or revoked. While there are limited exceptions to this rule, such as court intervention, the idea is that the Trust maintains its terms as set out by you as the grantor permanently. There are different types of Irrevocable Trusts, depending on the unique set of facts or purpose behind the Trust’s establishment. This type of Trust has its own tax identification number and is subject to administrative costs upon establishment, such as yearly tax returns, maintenance fees, etc. Often Irrevocable Trusts are used to transfer assets out of an estate prior to death, set up a Trust for someone with special needs, or to plan for future estate taxes utilizing life insurance.