Trust options include revocable or irrevocable trusts, living or testamentary trusts. The reason there are so many different kinds of trusts is they can range from very simple to quite complex. It’s also due to the fact that trusts may be used for managing the property of an incapacitated, tax planning, business operation, investment, legal and/or personal purposes.
Generally, there are three parties to a trust: the trust maker, trustee, and beneficiary. The trust maker establishes the trust and decides what all of the provisions of the trust are. The trustee manages the trust property for the benefit of the beneficiary. The beneficiary receives the benefit of the trust.
What is the difference between a revocable and an irrevocable trust?
A revocable trust is one in which you as the trust maker reserves the right to make changes to the terms of the trust during your lifetime and even the right to revoke or cancel the trust entirely. An irrevocable trust is one in which, by its terms, you have given up the right, for you as trust maker, to revoke or make changes to the trust after signing it. However, that does not necessarily mean that changes cannot be made at all, just not by you as the trust maker. There are other ways to allow changes to occur that can be built into the terms of the irrevocable trust.
What is the difference between a living trust and a testamentary trust?
A living trust is a legal document that that becomes effective immediately upon signing and thus operates while you are living. A testamentary trust only is effective after your death and only in specific circumstances described in your will, where the trust is created.
The most frequent use of the testamentary trust is when mom and dad both die and their children are still minors. In that situation, the testamentary trust would spring out of the will and allow a separate trustee to manage the trust property outside of probate for the minor children until the children reach a designated age established by you in the trust provisions.
The living trust contains instructions for the trustee regarding what you, as the trust maker, want to have your assets managed and for who when you are alive and well, when you lose the mental or physical capacity — such as Alzheimer’s, stroke, and heart attack – and when you die. Normally you would be the trust maker, trustee and beneficiary of the living revocable trust while you are alive and well. So you are making all decisions as the trustee.
When you set up a living trust, you should transfer assets from your name to the name of your trustee of your living trust. All the assets transferred are no longer your property for title purposes, but are assets owned by the trust. However, for income tax purposes and asset protection purposes, you are considered to still own those assets. Because title to trust assets are not held in your individual name, those assets avoid the court probate process when you die, and they are not subject to court-imposed conservatorship if you become incapacitated. As trustee of your trust, you keep full control of all trust assets. During your lifetime, you can do anything with your assets that you could have before making the trust, by changing (or even canceling) your trust.
Advantages of having a living trust
- Avoid probate: If all your property is owned by a trust when you die, then legally you don’t own anything in your name. Therefore, probate is not needed to pass your property on to your heirs. Similarly, if all your property is in trust when you become incompetent, a conservatorship is not needed to manage your property. In either case, the person named in your trust as the successor trustee takes over. If you die, the successor trustee can manage and/or distribute the trust property according to the terms of your trust without having to go to probate court to authorize the distribution. If you become incompetent, the successor trustee can manage the property for your benefit without having to go to court for a conservatorship, and without ongoing court supervision.
- Tax planning: A living trust can help avoid or reduce estate taxes, and gift taxes.
- Control: Like a will, a living trust lets you decide specifically what will happen to your property if you die. Unlike a will, however, you can use a trust to control when your heirs will receive their inheritance and how much at a time. During your lifetime you can be the trustee of a living trust and allow you to control what the trust property is invested in and when distributions to beneficiaries are made and in what amounts.
- Protection against creditors: A revocable living trust does not shelter the trust maker from creditors. However, a properly drafted revocable living trust can hold assets in trust for the benefit of the beneficiaries and protect those assets from the beneficiaries’ creditors after your death.
However, a properly drafted irrevocable living trust can shelter assets from your catastrophic creditors during your lifetime and allow you to eventually protect those assets from Medicaid and the nursing home as well. You can even be the Trustee of that trust. However, you cannot be a direct beneficiary of an irrevocable trust and still get the asset protection.
- Privacy: A living trust is not a public record. Therefore, the general public, and anyone who is not a beneficiary, does not have a right to know about the assets in your trust.