There are a lot of misconceptions about trusts. As a result, many people make poor decisions because of a lack of understanding. The single most important starting point about trusts is this: there are different types of trusts that satisfy varying objectives.
In this post, we will look at the subject from an overview so you can make informed decisions going forward.
Debunking the Myths
Before we get into the nuts and bolts, we should punch a hole in a couple of the myths that are widely held. The first one is the idea that you lose all control of assets that you convey into a trust.
This is not the case at all when it comes to certain types of trusts, and we will explain this in detail.
Secondly, there is the matter of wealth. Yes, high-net-worth individuals use trusts to satisfy certain objectives, like estate tax efficiency and multigenerational wealth management. However, there are various types of trusts that can be useful for people that are not extraordinarily wealthy.
Revocable Living Trusts: Total Control
Now we can start to look at the differences between the types of trusts. At the end of the day, the matter of revocability is at the root.
The revocable living trust is the most widely used trust in the field of estate planning. If you create this type of trust, you would be the “grantor” in a legal context. As the grantor, you would have the power to revoke the trust at any time. Should you take this step, it would no longer exist, and you would reassume direct possession of the property.
Assets that you conveyed to the trust would become your personal property once again. This is contrary to the belief that a lot of people harbor about losing control of assets that you transferred to a trust.
Your control extends beyond the power to dissolve the trust. While you are living, you would be the trustee, so you would manage the trust on every level. You would have absolute and unfettered access to any resources that you convey to the trust.
Living Trust Benefits
If you were to use a will to transfer assets after your passing, the executor that you name would admit the will to probate. This is a costly, time-consuming, and public process that takes place under the supervision of the probate court.
On the other hand, if you have a living trust, the successor trustee that you name in the document would assume control after your death. At that time, the trustee would follow the instructions that you recorded in the trust regarding asset distributions. The probate court would not be involved.
Moreover, you can empower the successor trustee to manage the trust in the event of your incapacity. This is very useful, because a significant percentage of seniors become unable to handle their affairs eventually.
You can include spendthrift protections when you have a living trust. The creditors of the beneficiaries would not be able to access the principal after you’re gone.
In the trust declaration, you can dictate the terms of the distributions. For example, you can allow for monthly distributions for a set number of years until the beneficiaries reach certain age plateaus.
Summing it up, these are the most compelling benefits of a living trust:
- You maintain total control while you are living
- Probate is avoided after your passing
- Your successor trustee can step in if you become incapacitated
- The assets will be protected after you’re gone
- You have the power to set distribution terms
All the above can sound appealing, but in some situations, the loss of absolute control while you are living is a good thing. With this in mind, let’s move on to irrevocable trusts.
Incidents of Ownership
The legal concept of “incidents of ownership” is key when it comes to the two types of trusts. With a living trust, you retain incidents of ownership because you have the power to revoke the trust, and you have direct access to the assets.
When you have an irrevocable trust, the dynamic is very different. You as the grantor will surrender access to the principal when you fund the trust, so you are not retaining incidents of ownership. This is the whole point under some circumstances.
Estate Tax Efficiency
High-net-worth individuals can be exposed to the federal estate tax. Assets in a revocable living trust would count as part of your taxable estate because you retain incidents of ownership.
Conversely, resources that have been transferred to an irrevocable trust would not be part of your estate for tax purposes. There are various types of tax efficiency trusts that can be used to facilitate eventual transfers at tax discounts.
Asset Protection
When you place assets into an irrevocable trust, generally speaking, they are protected from future creditors or other types of legal actions. Someone in a high-risk profession like a doctor or lawyer may choose to place assets into an irrevocable trust to protect them.
Discretionary and Incentive Trusts
You could create an irrevocable trust and give the trustee the power to distribute assets to a beneficiary on a discretionary basis. Since the trust is the legal owner of the assets, the resources would be protected from most actions or judgments against the beneficiary.
Similarly, there are irrevocable trusts that include incentives. With these trusts, the trustee is instructed to provide distributions as long as the beneficiary satisfies certain conditions.
Summing It Up
For most people, the most important takeaway is this: don’t assume that a trust is not right for you unless you are a multimillionaire. There are different types of trusts that can satisfy targeted objectives that can be held by people of relatively ordinary means.
We have provided a partial list of the irrevocable trusts that can be used, but there are others. When you work with our firm to plan your estate, you will become apprised of your options so you can make fully informed decisions.
Let’s Get Started!
To schedule a consultation at our Bluffton, SC estate planning office, give us a call at 843-815-8580. If you would rather send us a message, fill out our contact form and we will get back in touch with you promptly.
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