Everything You Need to Know About Trusts

What is a Trust?

A trust is a type of legal entity that holds property for the benefit of people that you care about and is governed by a set of rules and managed by a trustee.

Sometimes known as ‘will substitutes,’ revocable and irrevocable trusts are tools that you can use to help ensure your wishes are carried out, protect disabled beneficiaries, help children spend/budget properly, protect assets from creditors, and promote family harmony.

Trusts can be created and funded during your lifetime. Some trusts, called “testamentary trusts”, are part of your Will and only come “alive” after you die under certain circumstances.

Trusts Are Only for Wealthy People, Right?

Wrong. They are not just for people with lots of assets; trusts can be used by anyone. In fact, most people who have young children and who have a Will probably have a testamentary trust in their Will.

What’s Included in a Trust Document?

Generally, a trust document includes the name of the person who created it [known as the grantor or settlor], the names of the beneficiaries, the name of the trustee, rules for holding and investing the trust assets and directions on how to distribute the assets held in the trust to the beneficiaries.

What are Revocable Trusts?

Revocable trusts are created during your lifetime and can be revoked (i.e. cancelled) or amended at any time until the grantor either passes away or becomes incapacitated. These are sometimes called “living trusts”. The grantor is typically the trustee and has complete control of any assets held in the trust. During the life of the trust, income earned, taxed and distributed to the grantor. Upon the grantor’s death, it becomes irrevocable, and its assets are managed and distributed as the trust document directs. The trust can continue holding, managing and distributing assets for many years after the grantor’s death.

What are Irrevocable Trusts?

Irrevocable trusts are permanent. The grantor can’t make changes or updates to the trust. Once transferred, grantors effectively give up ownership rights to the assets. The trustee is in control of the assets and must administer the trust according to the trust document. Irrevocable trusts are often used to gain advantages for tax purposes.

What are the Key Considerations for Each Type of Trust?

Advantages of a revocable trust include its flexibility (i.e., revocable, changeable, etc.), and the fact that its assets remain under the control of the grantor/trustee. Revocable trusts are private, meaning their details won’t become publicly known after the death of the settlor.

Disadvantages include the initial cost of having an attorney draft the trust, as well as the time and cost of reregistering your property in the name of the trust. Revocable trusts should be reviewed and amended as circumstances change.

Advantages to creating irrevocable trusts include protecting assets from creditors and spendthrift beneficiaries. They can be used to help preserve eligibility for government programs for special needs beneficiaries. They also can be an effective estate planning tool to minimize estate tax liability, especially in large estates.

A disadvantage is implied in the name itself, in that it is irrevocable. Additionally, once transferred, you will effectively lose control over the assets placed in the trust.

Learn More

When considering a trust, the experienced estate planning attorneys at Fiffik Law Group and help you understand whether a trust is right for your estate plan.