Terminology is among the biggest barriers to estate planning. Many people understand the importance of protecting their assets and working to ensure their loved ones’ long-term financial well-being but are turned away by all the jargon that accompanies the task. What is a trust? What are advance directives? What is an executor? Such questions often turn folks away before they ever begin. This article endeavors to change that by shedding light on one of estate planning’s most complex subjects: trust legislation.
What Is a Trust?
In simple terms, a trust is a legal arrangement for managing assets. A trust is established when a person (referred to as the trustor) gives another party (the trustee) the legal right to hold assets in the name of a third party (the beneficiary).
Trusts are created for a wide range of purposes. Among these, the most common are reducing estate taxes, keeping assets out of probate court, protecting a loved ones’ inheritance, caring for a child with special needs, and building a long-term care plan, among many others. Naturally, different types of trusts exist to meet these different aims.
Trust Types: Revocable vs. Irrevocable Trust
Revocability is the principle distinction that differentiates different types of trusts.
A revocable trust (sometimes referred to as a living trust) is exactly what it sounds like: a legal arrangement that can be revoked at any time. This means that while the assets placed in this type of trust remain titled as the property of the trust (and not your own), you, the trustor, can change this and regain possession at any time.
A revocable trust or living trust is commonly used to keep assets out of probate court. A trust agreement allows you to state to whom you wish the trust assets to pass when you die and thereby cuts out the need for court intervention (as would be the case with a traditional Will).
A revocable trust also provides for the possibility of including provisions that allow the trustor to retain control over how their assets are used. This is a crucial feature if the trust assets are destined for a minor child or beneficiary who may be inclined to spend their inheritance in irresponsible or damaging ways.
One thing a living trust cannot achieve is a reduction of potential estate taxes. Luckily, this is where irrevocable trusts come into play.
The moment you place assets in an irrevocable trust, they move permanently out of your name and into the name of the trust. An irrevocable trust cannot easily be changed or altered which is why it is both a powerful tool for managing taxes and ensuring qualification for government benefits.
Assets placed in an irrevocable trust are not taxable according to estate tax legislation which means that if you own more than is currently exempt by the government, you may want to consider this recourse.
Likewise, if you anticipate needing to rely on Medicaid benefits to cover potential long-term care needs, you may want to establish an irrevocable trust to ensure you meet the asset and income restrictions required of qualification for the program.
Trusts are powerful legal tools but determining the type best suited to your needs is not easy. Furthermore, funding a trust is sometimes complex and so it is important to seek counsel from an experienced estate planning attorney when looking into the subject.
To learn more about the different types of trusts or about any other matter related to estate planning, do not hesitate to contact the Polaris Law Group either by calling 636-757-3850 or using the contact form on our webpage.