A trust is a good solid testamentary document and very useful for certain aspects of estate planning, but a trust is not the one-size-fits-all panacea that some lawyers and estate planners like to portray it to be.
When part of an estate plan, an intervivos trust allows the maker of the trust (the Grantor) or third parties (a trustee) to hold Grantor's assets to benefit future persons or entities. While trusts are part of estate plans and can avoid the actual filing of a probate matter, the idea that a trust can avoid litigation or reduce taxes is a misnomer.
- A trust administration avoids probate so long as you don't need to probate the pour-over will (a standby part of the trust because the grantor of the trust forgot to put property into the trust).
- Trusts administration and will probate actions take about the same amount of time.
- Trusts must still give notice to creditors and give creditors four months to file claims with the trustee just like a will being probated.
- Trust documents can become the subject of litigation by beneficiaries or from other creditors. Trusts do not save the grantor any money over the same sort of litigation in probate court.
While Trusts can hold and invest property on behalf of others, thus perhaps avoiding estate taxation at the time of the trust grantor's death, so can a testamentary trust in a Will if the Will is made for the same purpose. If tax avoidance is the goal, tax avoidance can be accomplished in the probate of a will with a proper testamentary trust just the same as the winding up of an ordinary trust. The value of the testamentary trust is that it avoids the costs of setting up a trust if the contingency on which the trust is made does not happen. For example a testamentary trust where all of grandfather's farm real estate goes to benefit the grandson who wants to farm is not set up if grandson accidentally dies before grandfather.
If you have real estate property in multiple states, an intervivos trust has considerable advantages and savings on expenses over probating a will made in one state in each other state where property is owned.
Other benefits of trusts include:
- Control of your wealth. You can specify the terms of a trust precisely, controlling when and to whom distributions may be made. You may also, for example, set up a revocable trust so that the trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.
- Protection of your legacy. A properly constructed trust can help protect your estate from your heirs’ creditors or from beneficiaries who may not be adept at money management.
- Privacy and probate savings. Probate is a matter of public record; a trust may allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.
Basic types of trusts include the Marital or "A" trust along with the bypass trust or "B" trust. With exemptions of property at $5.43 million under the internal revenue code, and with the concept of "portability of the marital exemption", where a second spouse to die can shelter $10.64 million from estate taxes, these sorts of trusts are not as important as previously. However, what Congress giveth it can take away. If they go backwards to a more narrow exemption, these trusts become important again to shelter property from taxation. Our view has been that A-B trust usage is still important and guards against congressional backsliding on the estate tax exemption.
If you think Washington won't reneg and consider backsliding on estate tax topics, see our segment "DON'T TAX ME." in this list of topics.
A testamentary trust is a trust that looks like a trust and acts like an ordinary trust except that it resides in, and springs to life at the conclusion of the probate of a Will. Almost everything that can be done in an ordinary trust can be done in a testamentary trust.
There are many types of trusts; a major distinction between them is whether they are revocable or irrevocable.
Revocable trust: Also known as a living trust, a revocable trust can help assets pass outside of probate, yet allows you to retain control of the assets during your (the grantor’s) lifetime. It is flexible and can be dissolved at any time, should your circumstances or intentions change. A revocable trust typically becomes irrevocable upon the death of the grantor.
You can name yourself trustee (or co-trustee) and retain ownership and control over the trust, its terms and assets during your lifetime, but make provisions for a successor trustee to manage them in the event of your incapacity or death.
Although a revocable trust may help avoid probate, it is usually still subject to estate taxes when the grantor of the trust dies. It also means that during your lifetime, it is treated like any other asset you own.
Unlike a will, however, trusts must have the property on which is going into the trust titled in the trust's name or the trust is "unfunded," and requires the probate of a pour-over will after the grantor's death to complete the trust.
Irrevocable trust: An irrevocable trust typically transfers your assets out of your (the grantor’s) estate and potentially out of the reach of estate taxes and probate, but cannot be altered by the grantor after it has been executed. Therefore, once you establish the trust, you will lose control over the assets and you cannot change any terms or decide to dissolve the trust.
An irrevocable trust removes trust assets from your estate, meaning at death those assets are not in your estate and thus are not valued nor subject to an estate tax. Usually you get a tax deduction for the value of the assets. An Irrevocable Trust is generally preferred over a revocable trust if your primary aim is to reduce the amount subject to estate taxes by effectively removing the trust assets from your estate.
Trust assets are also beyond the reach of any creditor in case there is a legal judgment against you.
Generally, the cost of a trust is more at the front end of the process (before death), but less to wind up than a probate action. However, general statements and do not always hold true. If a trust that was to be administered privately sees a fight between beneficiaries who believe the trust is administered wrongfully and the spat spills over into court, a trust action can be just as expensive as any fight in a probate court.
The tax information and estate planning information contained herein is general in nature, and is provided for infomational purposes only. Do not construe the advice as direct for your situation. It is neither legal nor tax advice. We always recommend consulting tax professionals about taxes regarding trusts and probated estates