Getting to Know Trusts

Which One is Right for You?

December 2, 2019

Do I Need a Trust?

You may have a disabled child and want to permit that child to inherit without losing government benefits. Or perhaps your or your spouse’s health is declining and you foresee eventually needing long-term care benefits. Or, you might be in the classic “trust fund” situation, where you’re concerned that your children won’t be able to manage money wisely.

All these are excellent reasons to consider a trust. But what kind of trust is best suited to your needs? To determine whether a trust is right for you, you need to understand what a trust is, how it operates and whether it will serve your objectives.

What is a Trust?

A trust is like a treasure chest. You originally bought property or earned money in your own name. You then transfer those assets into the trust’s name – into your treasure chest, in other words. The trust treasure chest becomes a legal entity separate from you, which now holds your property in the name of the trust, instead of in your name as an individual.

In establishing the trust, you will need to identify people who will occupy the three roles involved in managing trust property. First, there is the grantor, or settlor, or trustmaker –the person creating the trust. That person is you in most cases. Second, you appoint a trustee, the person or entity responsible for managing trust property and following the directions contained in the trust document. Third, you identify the persons you want to receive your property—these are beneficiaries.

In legal terms, a trust is a fiduciary agreement between you the original property-owner, your trustee, and your beneficiary. The trust document contains instructions for what you want done with trust property, both for how you want it invested and, also, for when and how you want trust assets to be distributed to your beneficiaries. Trusts are thus a highly efficient hybrid between a power of attorney, an asset-management vehicle, and a last will and testament, all rolled into one legal entity and document.

There are two basic kinds of trusts: revocable trusts and irrevocable trusts.

The Revocable Trust

A revocable trust or “living” trust is, in essence, a treasure chest with the lid open. As grantor/settlor/trustmaker of a revocable trust, you can access trust property easily and freely.

Typically, you occupy all three roles in a revocable trust – you are the grantor, trustee, and beneficiary. You can also tinker with the trust terms by freely amending them to change the instructions, beneficiaries, or trustees. Or, you can revoke the whole thing. Before that point, though, the trust document will be there to take care of everything you want it to.

If you should have an accident and lose capacity, the terms of your trust will designate a person to step in on your behalf thereby avoiding the need to go to court to have a guardian appointed for you. The trust will also direct who inherits your property, thus keeping your affairs private and out of probate court. This feature is especially effective if you formerly owned real property in several states, and then transferred your property to your trust. By transferring the property to your living trust, you avoid having to open a probate proceeding in each state where your property is located, thereby eliminating costly court fees and administrative delays.

The Irrevocable Trust

An irrevocable trust resembles a treasure chest with the lid locked. Your trustee – who generally cannot be you – is the one with the key. This may be the trust for you if you need or want to permanently give away property to someone else or if you wish to protect your assets from lawsuits or judgments.

While you are still the grantor for an irrevocable trust, you cannot be either the trustee or the beneficiary of this type of trust in order for it to be valid and function properly. Once you establish the trust and transfer property to it, you generally lose control over and access to the trust property. This relinquishment of control is necessary to enable you to protect your property; the general idea is that if you do not have control over or access to property, then your creditors cannot reach those assets either. Therefore, once an irrevocable trust is established, you as grantor cannot directly alter its terms, terminate the trust, or take any other significant actions that would indicate you retained control over or management of the trust property. Generally speaking, your access to trust property is restricted or entirely precluded, in order to enjoy the benefits of this kind of trust.

However, you as the trustmaker still designate the trustee and beneficiaries, and establish the conditions under which beneficiaries are to receive trust property. You can also designate a person or entity as a “trust protector,” who can alter trust language, correct drafting errors, or create a new similar trust if the law changes.

Trust Caveats

While some sophisticated trusts do convey tax benefits, for the most part the IRS considers revocable trusts to be invisible. You as grantor/settlor/trustmaker will still pay tax on the revocable-trust income, albeit at your individual rate and not at the prohibitive trust rate.

Also, keep in mind that revocable trusts provide no protection against creditors; since you retain full control over the property of the trust, that property is exposed and available to your creditors. While irrevocable trusts are free from that kind of interference, great care must be taken to ensure that the trust is properly and legitimately established and is not a vehicle to conceal property or defraud creditors. If you create such a trust while credit problems are looming or have already arrived, you risk that your trust may be invalidated as a fraudulent conveyance.

Now that you have the trust basics, let us help you design and implement the trust that is right for you.

Custom-building a treasure chest to fit your specific needs is what we do. To get started, contact our offices at 678-319-0100.

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