There are several advantages that including a trust in your estate plan can offer you and your loved ones, whether you’re wanting to avoid probate, reduce potential estate taxes, or assume greater control over how your estate is dispersed after your passing.
Knowing how each form of trust differs, what objectives a specific trust might help you achieve, and if you even need trust in your estate plan can be difficult given the variety of trusts that exist. Here is an overview of the three types of trust by an estate lawyer to assist you to start understanding the alternatives available.
Types of trust by an estate planning lawyer
1. Revocable Trusts
Revocable trusts, commonly referred to as living trusts, are intended to prevent the legal process of dispersing an estate known as probate. The process of administering your estate through probate is not the best choice for your heirs because it can be time-consuming, expensive, and open to the public.
If you have a property in several states, using a revocable trust can be especially beneficial. For instance, you might be subject to probate in both Iowa and northern Minnesota if you own a home here and a cabin there. However, if those two properties are held in a revocable trust, you’ll probably be able to completely avoid probate, which will speed up and reduce the expense of administering your estate.
Revocable living trust benefits by an estate lawyer
At the time of death, assets held in the trust are exempt from probate. They can be given out right away. Any remaining assets after death are transferred into the trust through the use of a pour-over will. Because assets held in trust are not included in the estate of the deceased, the value of the taxable estate is reduced. Ensures that money is kept private after death. Enables the management of assets by a trustee or successor trustee in the event of the grantor’s incapacitation.
Cheaper to establish than a lot of other trust types by an estate lawyer. In places where there is community property, the inheritance that the trust provides is a separate asset of the beneficiary. If the beneficiary does not declare it to be community property, it does not become a part of it. Enables the grantor to decide when and how to distribute an inheritance to beneficiaries.
Revocable Living Trust drawback
Asset protection is not a feature of revocable trusts. Assets are still available to the grantor, which means the grantor’s creditors can still access them. If the grantor needs to use Social Security or Medicare to pay for long-term care later in life, a revocable trust may prevent them from doing so.
2. Irrevocable Trusts
Revocable trusts can alter or remove their assets, but irrevocable trusts cannot. Assets placed in an irrevocable trust has effectively removed from your estate because you have given up authority over them, shielding you from potential estate taxes.
Irrevocable trusts come in a wide variety of forms. One typical illustration is the irrevocable life insurance trust (ILIT), a type of life insurance policy whose death benefits can be distributed to your beneficiaries or used to defray some of the costs associated with managing your estate without subjecting you to taxes.
Advantages of an irrrevocable trust
At the moment of death, assets kept in the trust are exempt from probate. After death, assets will transferred through a pour-over. The distribution of assets is immediate.
Reduces and, in some cases, even completely eliminates wealth transfer expenses including probate costs, gift taxes, and estate taxes.
Ensures that money will remain private after death. An irrevocable trust does not permit its grantor to access its assets, and its creditors cannot access its assets either. The grantor determines the manner and timing of the recipients’ inheritance distribution. In places where there is community property, the inheritance supplied by the trust is an individual asset of the beneficiary and does not become a part of the community property unless the beneficiary specifically designates it as such.
Drawbacks of Irrevocable Trusts
It can’t change once it put into practice. The trust’s stated beneficiaries will continue to receive payments. Even though the beneficiaries’ life may have changed, the terms of the trust will not change.
Assets held in trust cannot accessed by the grantor in the future. More expensive to establish than a living trust and requiring legal assistance.
It is feasible to establish a trust that takes effect after your death rather than setting one up and supporting it right away. This sort of trust, known as a testamentary trust, has established through the creation of a will, and the terms of the trust are specified in the will. Trusts for minor children are frequently establish by using testamentary trusts as a tool. Even if the assets in a testamentary trust can be susceptible to probate, the freedom this kind of trust affords in selecting a trustee might exceed its expenses.
Remember that creating a trust can be fairly expensive before moving forward and including one in your estate plan. Before including a trust in your estate plan, make sure it makes sense for you by speaking with your financial advisor or an estate planning lawyer.
The benefits of testamentary trusts in a nutshell
Income distributed to beneficiaries via trusts is not subject to taxation.
The trustee may distribute revenue to any number of beneficiaries at his or her discretion. Tax breaks for testamentary trusts don’t just apply to income and capital gains from assets. That are present in the trust at the time of your passing. On the transfer of your assets to your executor and then to your testamentary trust. Taxes aren’t usually due.
Drawbacks of testamentary trusts in a nutshell
- However, assets purchased for the trust by the trustee after your passing might subject to capital gains tax. Depending on the state in which you reside.
- Capital gains tax exemptions for homes held in testamentary trusts can have tax implications
- The number of assets in your trust will reduce by ongoing administration costs like accounting fees and tax preparation services.
- On income that had not dispersed, the trust must pay tax.