When people hear the term trust, in reference to estate planning, they often assume that only the wealthy or those with complicated estates need one. However, that is far from the truth. There are many benefits that a trust can provide for those who would be considered “average” folks or simply those who are not extremely wealthy and don’t have complicated estates. Such advantages include tax preferences, avoiding probate matters, and managing assets for beneficiaries’ benefit.
Trusts are highly versatile vehicles used to protect assets for the present moment, as well as into the future, long after the original asset owner’s death. Trusts can include various assets, such as cash, investments, and real estate property. Under a trust, a trustor, also known as a settlor or a grantor, gives another party, the trustee, the right to hold title to property or assets in the manner instructed by the settlor for the benefit of a third party, the beneficiary. Trusts are established to provide legal protection for the trustor’s assets to make sure that those assets are distributed according to the wishes of the trustor.
There are several types of trust, but they all boil down to whether the trust is living or testamentary, revocable or irrevocable, and funded or unfunded. So, let’s break down what these terms mean.
Testamentary Trust: A testamentary trust, also referred to as a will trust, is a trust that is created upon the death of the grantor. These trusts are detailed in one’s last will and testament. Testamentary trust, unlike living trust, are irrevocable and are subject to probate court because the trust itself does not come into existence until the will has been probated and the executor settles the estate. Until one’s death, a grantor may change, amend, or modify a testamentary trust during the testator’s lifetime because it does not actually exist yet.
Living trust: A living trust, also referred to as an inter-vivos trust, is one created by the grantor while they are still alive in order to name the beneficiaries of property and assets upon death. Under this type of trust, assets are passed outside of probate court, which is the judicial process wherein a court appoints an executor to carry out the provisions of a will. These trusts may be revocable or irrevocable, which will be further explained below.
Revocable Trust: A revocable living trust is an estate planning trust that deeds property to an heir but allows the grantor to retain control over the property during his or her lifetime. As such, the grantor may use, spend down, buy, and sell assets from the trust while living. Additionally, the grantor may dissolve the trust at any point. Upon the grantor’s death, the property passes to the beneficiary, avoiding probate court. While the revocable living trust does not provide tax savings for the grantor during their lifetime, the trust becomes ‘irrevocable’ upon death since the grantor is no longer living and available to amend it or dissolve it, and the beneficiary is then entitled to tax advantages.
Irrevocable Trust: An irrevocable living trust is an estate planning trust wherein the grantor does not retain control of assets or property. These trusts are also funded with cash or other assets at the time of its creation. This immediate transfer of assets or property into the trust creates certain tax advantages and other benefits for the grantor. An irrevocable living trust may also be used to avoid probate matters.
Another important factor of an irrevocable trust is that the grantor cannot legally act as trustee of an irrevocable trust and can never take their property or money back from the trust unless they’ve named themselves as a beneficiary and set terms of distribution for themselves.
Funded Trust: A funded trust means that the trustor has not only listed specific property and assets in the trust, but has also transferred something into the trust. To do this, one must physically change the titles of their assets from their individual name (or joint names, if married) to the name of the trust. You will also change the corresponding beneficiary designations to the trust.
Unfunded Trust: An unfunded trust is a trust that has been established but has not been funded with any significant assets. An unfunded trust may work in conjunction with a last will and testament or a pour-over will. However, using these methods can result in complicated circumstances. If a trust remains unfunded at death, the assets and property will not be distributed per the guidelines of the trust.
Trust and estate planning is a complex matter. You can in fact create multiple trusts or a single trust and they do not have to follow the typical flow of things. For example, you can direct your living trust to create a testamentary trust in light of having a will. Similarly, you can effectively, have a living trust, testamentary trust, and a last will and testament based on your needs and desired structure.
Because of the complexities of estate planning, when considering a trust always seek professional advice. Consult with an attorney to ensure the protection of your assets for your benefit, as well as that of your loved ones. We at the Curry Law Firm are here to assist you with developing an estate plan that fits your unique needs. Feel free to contact us today via email or phone to schedule a consultation.
The Curry Law Firm LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.
© The Curry Law Firm