Trusts are a common and useful estate planning tool. When properly drafted and funded, trusts can serve to avoid the probate process, provide asset privacy, and in some cases, reduce tax burdens. Trusts vary greatly in terms of form and complexity, so it is always important to discuss your assets and goals with your estate planning attorney so the proper trust structure can be implemented. This post will focus on the two most common categories of trusts: revocable living trusts and irrevocable trusts. There are many distinctions between the two, and this blog post will briefly set forth the differences and benefits of each type, depending upon the settlor’s assets and estate planning goals.
Revocable living trusts, or revocable trusts, are a very common estate planning tool that can serve a majority of estates. The individual holding the assets and directing the creation of the trust is the “settlor” of the trust and can serve as trustee of the trust for the remainder of their lifetime. Once created, it is the settlor’s job to fund the trust by properly conveying assets out of the individual’s name and into the trust. The settlor, as trustee of the revocable trust, maintains full management control of any assets conveyed into the trust. This offers a great deal of flexibility during the trustee’s lifetime. The trustee may sell assets conveyed into the trust, convey assets back out of the trust and into the individual’s name, or revoke the trust in its entirety. Upon the death of the settlor/trustee, the assets that were properly conveyed into the trust will pass to the beneficiaries under the trust, according to the terms of the trust. Any assets subject to probate that were not conveyed into the trust will need to go through the probate process. Frequently, a revocable trust is accompanied by a pour over will, which provides that the sole beneficiary of the individual’s estate is the revocable trust. The pour over will prevents funding failures where the settlor, during their lifetime, did not complete conveyances of all probate assets into the trust. Revocable trusts are generally less complex than irrevocable trusts and offer much greater flexibility over the conveyancing and management of assets during the settlor’s lifetime. They are not, however, the most appropriate form of trust if a client is worried about their estate assets approaching or exceeding estate tax limits.
Irrevocable trusts are just that – irrevocable. The terms are rigid, and there is little flexibility once assets are conveyed into an irrevocable trust. This form of trust, however, can be very beneficial to high value estates. As soon as the irrevocable trust agreement is signed and assets are placed into the trust, the assets are considered removed from the settlor’s taxable estate and will not be subject to estate tax upon death. Irrevocable trusts can therefore be extraordinarily useful in reducing estate tax burdens, but there are difficult hoops to jump through if the settlor wishes to take back or change management of assets that have been conveyed into an irrevocable trust. For example, changes would generally require the approval and consent of all beneficiaries under the trust. While they can be critically useful for certain high value estates, irrevocable trusts are less common and are more complex and rigid than the majority of estates require.
If you have further questions regarding trust structures or are ready to implement a trust into your estate plan, contact us. We’re ready to help you find the perfect structure for you and your estate planning goals!
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