Basic Information About Trusts
In this article, you will find:
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Revocable Living Trust
Go Figure
A will is a public document, available for inspection at your local courthouse when it goes into probate. Anyone who happens to be interested can make a trip downtown, obtain a copy of your will, and read all the details—juicy, or not.
This type of trust is set up while the grantor is still living, and allows the grantor to keep full control of the assets. The grantor also has the ability to revoke or amend the terms of the trust, or change the appointed trustee, while living. A revocable living trust becomes irrevocable when the grantor dies or becomes incapacitated. Many people consider a revocable living trust to be a substitute for a will, because the trust also can instruct how assets should be distributed. It's extremely difficult, however, for a trust to include everything covered in a will—it can be done but it takes a great deal of planning.
If you have a revocable living trust, you should still have a will. A revocable living trust can reduce the cost of settling an estate, and also the amount of time it takes. Funds held in a trust can be distributed much sooner than assets in an estate. A trust can also protect privacy because assets included in the trust don't have to pass through probate, which is a court proceeding in which a person's estate is settled. All creditors are paid off during probate, and heirs receive their shares of the estate after everything is settled. Waiting isn't usually necessary with a trust—distribution can occur when the trustee feels comfortable making distribution. And, while wills can be contested, trusts very rarely are contested.
A revocable trust can be funded or unfunded at death. If unfunded, the document is held (like your will) in a safe place, and then used when assets are paid to it. If the trust is funded prior to your death, you re-register assets from your name into the name of the trust. Shares of stock for example, are re-registered from belonging to Daniel Smith, to belonging to the Daniel Smith Trust, with Daniel Smith and Susan Jones as trustees. If you fund a trust prior to death, all assets held in the trust bypass probate.
Irrevocable Trust
Money Morsel
Assets that are in your control at the time of death generally are subject to federal estate taxes. Those not in your control, such as in a irrevocable trust, are not subject to federal tax because they're not considered as part of your property.
Usually established and used by people with a great deal of assets, irrevocable trusts, as the name implies, can't be amended or destroyed. Once the trust is set up, it remains in place, giving the grantor no opportunity to change his mind.
Irrevocable trusts are used primarily to reduce estate taxes, though they are also used to protect property for minor heirs. Irrevocable trusts also can be set up to provide income for a beneficiary, and then to divert the income to another place when the beneficiary dies.
Property that is turned over to an irrevocable trust, if set up properly, is no longer considered part of the estate of the person who turned it over. It still may be subject to other taxes, such as gift or capital gains, but those traditionally have been far lower than estate taxes. As with a revocable living trust, assets included in an irrevocable trust do not have to pass through probate.
There are various types of irrevocable trusts, the most common of which is the irrevocable life insurance trust. In that case, the trust “owns” a large life insurance policy, from which proceeds are paid directly into the trust at the time of the death of the grantor. Other irrevocable trusts include residuary trusts and marital trusts.
There are many types of trusts, all with different rules and benefits. Consult a financial planner or lawyer who specializes in estate planning for more information.