A living trust is one way to plan for passing on a legacy. This means an easy transfer of property, investments and other assets—to your family or other beneficiaries.
It’s a legal agreement used in planning ahead so that your loved ones can avoid the heavy process of probate when you die and also acts as guidance over your estate should you become incapacitated.
Whether you are considering generational family protection. Or you’re getting older and want some help managing your assets without giving up control. Setting up a revocable trust is one estate-planning option.
An Irrevocable Trust is usually used to move assets out of your name and control for the purpose of eventually being transferred to the next generation. This also reduces the value of your estate for estate tax purposes and provides protection from
creditors and lawsuits.
Trusts can be designed to meet specific purposes and concerns.
The policy is owned by the trust, so its proceeds are not generally included in the gross value of the decedent's
estate for estate tax purposes.
Upon your passing, the trust enforces your directives and can shelter assets from taxes, creditors or
legal problems. All living trusts are either revocable or irrevocable. The biggest difference is how it’s managed and what can or cannot be changed. There are three major roles in a living trust:
The trust maker (also referred to as the grantor, trustor or settlor), The trustee(s), and one or more beneficiaries. The trust maker transfers ownership of certain assets to a trust, and the trustee manages those assets for the benefit of the beneficiaries.
One of the most distinct differences between revocable and irrevocable trusts concerns who acts as trustee or successor trustee. When spouses form a revocable trust together, they typically each act as successor trustee for the other when, and if, it becomes necessary.
In an irrevocable trust, naming yourself as trustee defeats the purpose if your goal is to protect your
assets from creditors and other financial requirements.
State laws generally don't dictate who can or cannot act as successor trustee or as the trustee of an
irrevocable trust, and the terms of the trust document typically dictate what the trustee can or
cannot do. But the decision should be addressed thoughtfully.
These are some qualities to consider:
• They should be someone you trust to manage your investments well, and hopefully not lose money.
• They must be able to deal with beneficiaries, often on an ongoing basis, which can require tact and diplomacy.
• When the time comes, they must understand how to legally transfer trust assets to these beneficiaries.
• They should know how to handle sometimes complex financial transactions and have at least a rudimentary knowledge of state law.
Some people use a corporate trustee, and some name family members to this role, particularly as successor trustees. This situation can present a host of problems. Naming one son or daughter over another can create friction and imply a sense of favoritism. You're effectively trusting this person to put all personal feelings aside when dealing with your beneficiaries, many of whom are probably also family members.
Many who establish irrevocable trusts appoint professional trustees for this reason—either a trust attorney, an investment firm or a bank. While this takes personality and emotions out of the equation, keep in mind these entities don't work for free.5 Their service will cost your trust money that would otherwise have been passed to your beneficiaries.
A halfway measure might involve naming multiple co-trustees and requiring their unanimous agreement on any actions taken. It won't necessarily cut down on emotional friction, but you can at least be assured that decisions are balanced.
You may also want to consider naming a family friend or business associate and leaving your offspring and other family members out of any management roles.
Whether you are considering generational family protection. Or you’re getting older and want some help managing your assets without giving up control. Setting up a revocable trust is one estate-planning option.
In most cases, you, as the trust maker, would also become a trustee and at least one of the beneficiaries with a revocable living trust. The trust is typically managed for your benefit, and you retain certain rights over the trust. You can name additional beneficiaries who will inherit from the trust after you die.
If your goal is to provide continuity if you become disabled or mentally incapacitated, you would name another trustee, sometimes called a “successor trustee” as well. This avoids the necessity of having a court name a conservator or guardian to take over financial affairs when someone becomes unable to manage themselves.
You can also assign someone power of attorney to plan for the possibility that you’ll be unable to
manage your own affairs, but banks and brokers may have an easier time dealing with the trustee
structure.
Or, you may just want your family to be able to help as you get older or if you’ve got a progressing
illness. You can retain the right to act alone while having a co-trustee help too. Then, if your health declines, the co-trustee can take over without disruption.
Another common reason to establish a revocable trust is to avoid probate of your assets. If executed properly, a trust can negate the need for probate—the often arduous legal process used to determine if a will is valid.
If this is your goal, make sure to weigh the expected cost of probate against the cost and hassle of establishing a trust. With a trust, you must re-register your property and securities in the name of the trust. And probate can be very involved, particularly if you own real estate in more than one state, but it may not be.
In addition, you can prevent the details of your estate from becoming available to the public if you use a revocable living trust to manage your estate plan.
An Irrevocable Trust is usually used to move assets out of your name and control for the purpose of eventually being transferred to the next generation. This also reduces the value of your estate for estate tax purposes and provides
protection from creditors and lawsuits.
Irrevocable trusts have also been used to help with Medicaid eligibility because they avoid the
necessity of "spending down" assets; you've already transferred your assets into the trust, ideally
well outside of the look-back period.
You typically shouldn't serve as trustee when you form an irrevocable trust, nor can you take your
property back after you transfer it into an irrevocable trust. You can't undo or dissolve such a trust, either. Unlike with a revocable trust, where you reserve the right to dissolve or change the trust at any time (as long as you’re mentally competent), an irrevocable trust is, for the most part, forever.
Trusts can be designed to meet specific purposes and concerns.
• An Irrevocable Living Insurance Trust (ILIT) holds only an insurance policy on the trust maker's life.
The policy is owned by the trust, so its proceeds are not generally included in the gross value of
the decedent's estate for estate tax purposes.5
• A Special Needs Trust can be set up to provide for a disabled beneficiary in such a way that it
doesn't compromise their entitlement to Supplemental Security or Medicaid benefits.
• A Spendthrift Trust gives the trustee discretion as to how and when distributions should be made
to a beneficiary who isn't financially responsible, or to safeguard the inheritance in the event the beneficiary divorces.
