Trusts: The Variety and Objectives
A trust is a document that creates a fiduciary relationship between the creator of the trust, called a trustor, and a person whom confidence is reposed, called a trustee. A fiduciary relationship is one where one person stands in the position of trust and confidence in matters falling within the scope of such a relationship.
Typically, the person who holds the legal relationship of trust is tasked to take care of the money or other asset of another person. In case of a trust, one person places complete confidence in another person to carry out a particular transaction. As such, the trustee will be carrying out the wishes of the trustor for the fulfillment of the trust’s objectives.
There are many types of trusts being entered into by individuals that are designed and intended for different objectives. The most common of type of trust, however, is the revocable living trust, which is a popular estate planning tool.
In a revocable living trust, the creator of the trust can change its terms and conditions at will, without need of proving any just cause. It is a living trust, since it is entered into within the lifetime of the trustor.
It is an important tool in an attorney designed estate plan, as a trust can be a mode of transferring properties from the trustor to his or her children and heirs without the need of a lengthy and complicated probate proceeding. This is because a revocable living trust is not a will; its use reduces the chance of a court dispute and may allow an estate's assets to avoid a conservatorship.
More About Trusts
Most people agree that a revocable living trust is the cornerstone to a good estate plan.
Just like a will, a revocable living trust is a legal document that contains instructions as to the manner of distribution of an individual’s properties and rights upon his death. But unlike a will, a revocable living trust requires fewer formalities.
This kind of trust works well for many people, because it allows you to make changes to the trust as you go, rather than replacing the legal document as you get older and experience substantial changes in circumstances.
In this way, the living trust becomes a starting point and you can add additional estate planning documents to supplement your revocable trust as time goes on.
Being revocable, this type of trust generally allow the creator to maintain full control of the trust and change, terminate or revoke the trust up until his or her death. In irrevocable trusts, the consent and permission of the beneficiary is required in order to effectuate any modifications and even the termination of said trust.
But for tax considerations, you may create an irrevocable trust, which effectively removes the assets of the trustor from the remaining assets that may be subjected to estate tax. By essence of its irrevocable nature, this type of trust removes all incidents of ownership that the grantor may have over the properties transferred, as they are already considered a gift to the trust.
An irrevocable trust also relieves any tax liability on the part of the trustor over any income that can be generated by the assets, as it no longer stands to be benefited by them. This is true even if the trustor himself is the designated trustee of the properties intended for the beneficiaries.
In some cases, a trust may start as revocable but may later on become irrevocable due to an event, which is most commonly death. Irrevocable trusts are commonly created in addition to the revocable trust to carry out additional objectives. Among those common objectives are asset protection planning, maximizing tax benefits of an IRA or a 401k and reducing or eliminating estate tax liabilities.
In choosing whether to execute a revocable or irrevocable trust, the grantor must weigh in the advantages and disadvantages of the two options.
A revocable trust allows the grantor to control the principal as well as to the terms and manner of distributing the property to the beneficiary. Convenient as it may sound, however, a revocable trust actually involves much time and effort.
To avoid probate, the properties to be put into trust must all be re-titled and be registered under the name of the trustee. Moreover, revocable trusts entail greater costs, as they do not enjoy the same tax advantages granted on wills.
It will become more difficult if an irrevocable trust is executed by the grantor, as it is a more complex legal arrangement than a revocable trust. More so in cases where there could be current income tax and future estate tax implications in the use of an irrevocable trust.
When navigating the complexities of trusts and their different varieties, it is a good idea to meet with an experienced estate planning attorney who can analyze your specific objectives and give you recommendations for carrying out your wishes in the most beneficial way.
If you would like to learn more about trusts, or have questions about a trust, please contact us to schedule a free estate planning consultation with an experienced trusts lawyer.