Estate planning is often something that gets pushed to the back burner for many people due to common misconceptions that it’s only for the rich or the elderly. The fact of the matter is, estate planning is for anyone who owns something they value or has minor children or other dependents they care for. It’s not something to save for a rainy day; it’s something to plan for while you can.
Trusts are an important aspect of estate planning that offer a variety of benefits to consider. In this blog, we’ll explore three different types of trusts: revocable living trusts, irrevocable trusts, and testamentary trusts, so that you can make an informed decision on which trust, or combination of trusts, might best suit your needs.
1. Revocable Living Trust
A revocable living trust is the most commonly used trust in estate planning. It gives you the most control over your assets and can be managed during your lifetime.
One of the main benefits of revocable living trusts is that assets and beneficiaries can be added or removed, or the trust can be revoked altogether at any time. It offers much more flexibility than an irrevocable trust.
Another significant benefit is that it can help avoid probate. When you pass away, your assets can be transferred directly to beneficiaries, bypassing the probate process. In turn, this helps you obtain a layer of privacy, as probate is a public process.
One consideration of revocable trusts is that they are basically a disregarded entity by the IRS. As long as the creator of the trust is alive, the IRS acts as if the trust does not exist, though any income generated by the trust’s assets must be reported.
Once the creator of the trust dies, it essentially becomes irrevocable and can no longer be changed. A tax identification number must be obtained for the trust to distinguish it from the deceased grantor and their probate estate. This essentially means that when the assets are distributed, the beneficiaries will have to pay taxes on whatever is inherited.
It’s also important to note that a revocable living trust does not provide asset protection from creditors during the grantor’s lifetime. Since these types of trusts give you full control over your assets, the law considers you an effective owner. If a revocable living trust offered asset protection, it would lead to potential abuse and fraud.
2. Irrevocable Trust
An irrevocable trust is a type of trust that, once created, cannot be revoked. One of the main benefits of irrevocable trusts is that they provide significant asset protection. When you create an irrevocable trust, you’re essentially relinquishing control of your assets and transferring ownership to the trust itself. Since your assets are considered to be owned by the trust and are a separate legal entity, they’re generally protected from creditor claims, legal judgements, and other risks.
An irrevocable trust also offers the potential for tax savings. By putting assets into an irrevocable trust, you can remove them from your taxable estate. As previously discussed, the burden of taxes falls on the inheritors with a revocable living trust, but an irrevocable trust eliminates that burden, allowing more of your wealth to be passed on to your beneficiaries.
The biggest downside of irrevocable trusts is that they aren’t as flexible as revocable ones. Once the trust is established, it is not easy to change the terms or rearrange assets, which is why it’s important to create these types of trusts with your long-term goals in mind.
3. Testamentary Trust
A testamentary trust is part of a last will and testament, which outlines how your assets should be managed and distributed by a trustee. However, the trust itself isn’t established until after your (the grantor’s) death. These types of trusts can be used for minor children or other relatives who will inherit estate assets, as well as for any charitable contributions you might make.
Similarly to the other two types of trusts we’ve discussed, a testamentary trust gives you the ability to control how your assets are distributed. This type of trust can be especially useful if you have minor children or beneficiaries with special needs who are otherwise incapable of managing their financial affairs when you’re no longer here. For example, a testamentary trust can include stipulations for staggered amounts of assets to be transferred to your children at certain stages of their lives.
One of the biggest difficulties with testamentary trusts is that they’re subject to probate, as they are established through a will. The process of probate can be lengthy, expensive, and stressful.
Other Considerations of Revocable Living, Irrevocable, and Testamentary Trusts
It’s important to recognize that while each type of trust offers its own set of advantages and disadvantages, they also have different financial implications. That’s why it’s important to consult with an estate planning attorney when you’re considering the use of legal tools like trusts. They can use their experience and knowledge to help you understand which type of trust will benefit you the most and guide you through the steps of creating one.
We strongly recommend avoiding DIY estate planning templates, as these can lead to costly mistakes and legal complications you don’t want to deal with and wouldn’t want your loved ones to have to worry about when you’re no longer around. It’s always in your best interest to enlist the help of a professional when it comes to protecting the assets you’ve worked hard to accrue.
How Daly Law Offices Can Help
We understand that the idea of creating a trust can be overwhelming. There are many steps and details involved. If you need to create a trust but you’re unsure of what to do next, call Daly Law Offices today to schedule a free consultation. We will explain your options and responsibilities so that you can make informed decisions regarding your future. Get in contact with us today to discover how we can help you protect your legacy!
