Trusts are included in many estate plans. Some basic information about types of trusts appears below. To learn more about what type of estate plan would be best for you and your family, we invite you to call today for a free initial telephone consultation.
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A Revocable Living Trust is a legal document that is created by an individual or married couple, called the Grantor(s), to hold and oversee the Grantor's assets, which are in turn invested and spent pursuant to the terms of the trust. One of the purposes in creating a Living Trust is to pass assets upon the Grantor’s death, however, the trust usually states that the assets are for the benefit of the Grantor during his or her lifetime. In most cases, the Grantor will also be the Trustee, although an individual can choose a trusted family member or friend, or even an institution, to manage the trust property for a fee.
If the trust assets are intended for the benefit of the Grantor during his or her lifetime, the trust agreement will have specific provisions allowing the Trustee to manage, invest, and spend the trust assets for the Grantor’s own benefit during life. Thus, the Grantor will go about business as usual with regard to assets that have been funded into the trust, and the assets will be available to them whenever they are needed. The Grantor will also be able to use his or her own Social Security Number as the taxpayer identification number for the trust and file income taxes on IRS form 1040 instead of form 1041.
The trust agreement will also specify one or more procedures to be followed if the Grantor becomes mentally incapacitated. If the Trustee is determined to be mentally incompetent and can no longer properly serve as Trustee, then the trust agreement will name a Successor Trustee to take over the management and investment of the trust funds. The Successor Trustee will then be able to take care of and manage all of the Grantor's finances (assuming all of the Grantor's assets have been properly funded into the trust) for the benefit of the Grantor.
When the Grantor dies, the Successor Trustee pays the Grantor's final bills, debts, and taxes. The trust agreement will then contain instructions regarding who will receive the balance of the trust funds after all of the bills have been paid. The Successor Trustee will distribute the balance accordingly.
It is important to note for anyone considering setting up a Revocable Living Trust that this type of trust does not protect assets from creditors and does not help individuals who are looking to apply for Veteran’s or Medicaid Benefits. For this type of planning, an individual may need to set up an Irrevocable Trust.
Irrevocable trusts are used for a variety of reasons, but should never be created without serious consideration to the possible consequences.
An irrevocable trust results in the creator, or ‘Grantor,’ losing all right and ownership over whatever is placed into the trust. Any assets placed into the trust cannot be taken out by the Grantor and cannot be used for the Grantor’s benefit, or to pay the Grantor’s creditors.
Creating and funding an irrevocable trust can result in unwanted tax consequences and loss of control over assets. This type of planning, while often beneficial, is not right for everyone and should not be taken lightly.
Since the assets funded into a Trust, whether revocable or irrevocable during the Grantor's lifetime, are no longer considered to be owned by the Grantor but rather by the Trustee, there will be no need for the trust assets to be probated when the Grantor dies. Instead, the acting Trustee can proceed with settling the trust outside of probate and without any court supervision, interference, or fees.
If you would like to understand the different purposes for kinds of trusts, and whether this type of planning could benefit you or a loved one, please call us today.