A trust is an estate planning strategy that, like a will, determines what happens to assets at death. Different from wills, trusts can provide ways to reduce taxes and to avoid probate. The two basic types of trusts are the revocable trust and the irrevocable trust.
A trust is a separate legal entity—sometimes even with its own tax identification number—that a person, usually called a grantor, sets up during their lifetime to hold their assets. The trust provisions include the grantor’s instructions for how the assets should be managed. Once assets are placed inside a trust, the trustee manages them by following the grantor’s instructions set out in the trust provisions.
A revocable trust, also commonly referred to as a living trust, can be modified after it’s created. For example, the grantor can remove beneficiaries, add new beneficiaries, and change the provisions that determine how the trustee manages the trust assets. The grantor may serve as the trustee and appoint a successor trustee to manage the trust after the grantor’s death.
Potential benefits of a revocable trust:
For young beneficiaries of a revocable trust, real estate assets held within a trust can replace the need for a conservator if the grantor dies before the age of majority. In addition, the revocable trust can set aside a specific amount to be distributed over time for a spendthrift beneficiary who might not handle the money responsibly. Most importantly, revocable trusts offer ongoing flexibility during the grantor’s lifetime. In addition, they tend to be easier to set up than irrevocable trusts.
Potential downsides to a revocable trust:
Because the grantor retains some control over a revocable trust, the trust assets are not as protected from creditors as they would be in an irrevocable trust. In other words, if the grantor is sued and loses, the court can order that the revocable trust assets be liquidated to satisfy judgment. Further, when the grantor of a revocable trust dies, the assets held in trust are subject to state and federal estate taxes.
An irrevocable trust, as the name suggests, cannot be changed by the grantor once the trust agreement is signed. Only in extremely rare situations and depending upon state law, the terms of an irrevocable trust may be changed by a court order or by the consent of all the trust beneficiaries. Additionally, the grantor cannot be the trustee of an irrevocable trust. In other words, the grantor gives up control over the irrevocable trust assets.
Potential benefits of an irrevocable trust:
This surrender of control provides two key benefits: taxes and asset protection. Taxwise, the irrevocable trust assets are not subject to estate tax when the grantor dies. The grantor is also relieved of tax responsibility for any income the assets may generate. In terms of asset protection, the assets transferred into an irrevocable trust are protected from creditors, including judgment creditors.
Potential downsides to an irrevocable trust:
Again, an irrevocable trust cannot be altered by the grantor once the trust agreement is signed. And, precisely because it cannot be altered, an irrevocable trust can be more complicated to set up than a revocable trust.
Contact a Corning Estate Planning Attorney
Whether you are just beginning to research your estate planning options or you’ve got a sophisticated plan in place that requires maintenance, Roth Elder Law, PLLC is here for you every step of the way. Call us today to schedule an initial meeting at 607-962-6162 or complete this intake form and we’ll be in touch.