December 3, 2021
If you’re looking to avoid probate, limit possible estate taxes, or assume greater control over how your estate is distributed after you pass, a trust may be for you. But making an appointment with your estate attorney and saying you want to establish a trust is like going into a bakery and saying you want to purchase a cake. The baker is likely to ask a number of questions: What’s the occasion? How many people are we feeding? Which flavors would you like?
Similarly, an estate planning attorney should ask a series of questions when clients request a trust because a trust is a uniquely drafted document that’s created to reflect the circumstances of your particular situation. As your legal advisors our first question must be “Why do you think you need one?” This allows us to determine whether a trust is an appropriate planning tool.
One of your biggest challenges is knowing how each type of trust differs and the goals a particular trust can help you accomplish. Even more, do you even need a trust in the first place?
To appropriately determine need, it is helpful to understand the 3 primary classes of trusts: revocable, irrevocable, or testamentary.
A Revocable Trust
A revocable trust, also known as a living trust, is beneficial because provisions of the trust may be changed during the creator’s lifetime. Assets may be placed in trust and removed, the creator (also called the grantor) is entitled to all the benefits and income of the assets that are owned by the trust, and, if they desire, they are empowered to terminate the trust as well.
Only after death do the terms of the trust become unchangeable and the property held in the trust transfers to your beneficiaries. At that time, your heirs benefit because a revocable trust allows them to avoid probate, the lengthy, often expensive, legal process that takes place when it’s time to distribute your estate.
A revocable trust can also be effective if you own property in multiple states and would therefore be subject to probate in several states. However, if those two properties are owned inside of a revocable trust, you’ll likely be able to avoid probate entirely, thus making the process of administering your estate quicker and less costly.
A revocable trust also should designate a successor trustee who is empowered to manage the assets held in the trust should you become incapacitated in any way. This is particularly useful as individuals age and require the assistance of adult children to help manage their finances and pay bills. Because the adult child may be named as the successor trustee of the trust, they are automatically empowered to take over if necessary, without the need for access through a power of attorney or guardian appointment.
Finally, a revocable trust offers families a degree of privacy in their estate planning. Because a Will becomes a publicly available document once probated, many individuals may choose to have the dispositive provisions of their estate plan contained within a trust, which is only available to the named beneficiaries after someone dies.
A revocable trust can be funded or unfunded. Funded means the assets are typically placed into the trust when you establish it. An unfunded trust, by contrast, is actually nothing more than the trust document itself. That said, it is not void but rather inoperative until it is funded.
Sometimes, for whatever reason, the originators of the trust neglect to fund it. This is essentially sub-optimal handling as indefinitely not funding or not having a plan to fund a trust essentially negates what the trust is intended to accomplish. In other circumstances, however, a trust can remain unfunded until you die at which time your Will provides that any assets in the estate be placed into the trust.
An Irrevocable Trust
In contrast to a revocable trust, assets in an irrevocable trust can’t be removed or amended after they’ve been placed in the trust. Essentially this means that you relinquish control of the assets you place in an irrevocable trust, and they are removed from your estate, protecting you from possible estate taxes. Because the IRS and some states tax estates that are above a certain value, you can use the trust to reduce the value of your estate.
By placing assets into the trust and naming your heirs as beneficiaries, you can try to reduce your estate to a level below the tax exemption amount. Keep in mind that this amount fluctuates each year. In 2021, the exemption is $11.7 for an individual or $23.4 for a married couple. For people who pass away in 2022, the exemption amount will be $12.06 million. For a married couple, that comes to a combined exemption of $24.12 million.
Many people also choose to create irrevocable trusts and gift assets into them during their lifetime to preserve those assets from being depleted by long term health care costs that may arise as they age. There are a number of complex issues involved in gifting assets, however, which should be thoroughly evaluated with an experienced estate planning attorney.
A Testamentary Trust
A testamentary trust is established after you pass away and is created through a Will, in which case the terms of the trust are spelled out in the Will. Testamentary trusts are often used as a tool to help you create a trust for minor children. In addition, you can leave assets in trust for your adult children if you want to ensure that their inheritance ultimately passes to your grandchildren as opposed to your son or daughter’s spouse. A testamentary trust may in some cases shield your assets from your beneficiaries’ creditors or a divorce proceeding as well.
From the Grave
Despite the different types of trusts, 2 universal themes are huge motivators for establishing a trust: flexibility and control. You will have the flexibility to avoid probate and minimize estate taxes. Plus, you will have the control to ensure that your assets become a true financial legacy for your family. The terms you set up at the establishment of the trust or that you designate to go into effect upon your death will enable you to control—even from the grave—and dictate that your grandchildren and future generations of your family will benefit from the wealth you have accumulated during your lifetime.
That after all is the peace of mind that you derive from establishing and reassessing your estate plan early and periodically during your lifetime. At Phelan, Frantz, Ohlig & Wegbreit, we become your partners in providing the thoughtful guidance that will help you safeguard your legacy.
Call us at 908.232.2344 to develop a plan and determine the best wealth transfer vehicles personalized to your unique needs so that you can best provide for and protect your loved ones.