Trusts are a very important element of any comprehensive estate plan. What some clients may not realize is that there are several kinds of trusts from which they can select. For example, all trusts are categorized as either revocable or irrevocable. You may be wondering, what is the difference between them and which one do you need to meet your estate planning goals? As Kansas City trust attorneys, we can explain the differences.
What is the basic purpose of a trust?
A trust is essentially a fiduciary agreement between the person who creates the trust — that is the grantor, and a trustee. A fiduciary agreement is an agreement where one trusted person promises to act on behalf of another, solely for that person’s benefit. Based on the provisions of the trust agreement, the trustee will have the authority to manage and maintain the trust assets.
The main reasons trusts are essential for estate planning according to Kansas City trust attorneys
First, trusts provide comprehensive instructions on when and to whom trust assets should be distributed, typically at some specified time in the future. Second, trusts can also be used to provide protection for assets and for certain beneficiaries who need help with properly managing money. Finally, trusts are often used as a method for avoiding the costly, time-consuming and public legal process known as probate. If you are looking to avoid probate, discuss your options with one of our Kansas City trust attorneys.
What does it mean for a trust to be revocable?
When a trust is created to be revocable, that means it can be revoked or its terms can be modified at any time, as long as the grantor is alive and competent to do so. Upon the grantor’s death, though, the trust will become irrevocable. Therefore, revocable trusts are more flexible, because they allow you to modify the terms whenever your needs or goals change. Furthermore, you can serve as your own trustee in a revocable trust, at least initially. That means you are not required to relinquish control of the trust property until your incapacity or death.
How an irrevocable trust is different
An irrevocable trust is different from a revocable one because it cannot be modified after it has been created. Despite being less flexible, an irrevocable trust still has some favorable tax advantages. For example, assets that have been transferred to a trust that is irrevocable are deemed out of the reach of your creditors. Those assets also do not incur estate taxes because they now belong to the trust. For questions about estate taxes, contact one of our Kansas City trust attorneys.
An irrevocable trust offers the best asset protection
When a trust is irrevocable, it is the most effective for asset protection because you no longer control the property in the trust. In other words, the fact that it cannot be modified or canceled essentially means you no longer have the ability to take back the property. Consequently, the property is no longer subject to legal claims that have been brought against you. For this reason, a trust cannot truly be effective at protecting assets unless it is irrevocable.
Including the proper provisions in order to achieve asset protection
There are certain provisions that need to be included in an irrevocable trust so that it can effectively protect the assets you have transferred to the trust. For instance, any property interests you leave to your heirs or beneficiaries must either be contingent on a future condition or event or subject to the trustee’s complete discretion, with regard to the distribution of the funds or benefits.
Consider including spendthrift provisions to protect beneficiaries
You may want to consider including a “spendthrift” provision in your irrevocable trust. This specific type of language serves to protect any beneficiaries who may need additional assistance managing their inheritances. The crucial thing to remember is that only the assets owned by the trust will be protected. In other words, if you transfer any assets outside of the trust, those assets will immediately become subject to creditor’s claims and other legal liabilities.
Other types of irrevocable trusts you may want to include
There are many types of irrevocable trusts commonly used in estate planning. For example, an Irrevocable Life Insurance Trust (ILIT) is often used to eliminate the proceeds from your life insurance policies from your taxable estate. This, in turn, decreases your estate’s tax liability. A Grantor Retained Annuity Trust (GRAT) is a type of irrevocable trust that is funded by gifts from the grantor, which then passes on future appreciation of those assets to the next generation.
If you have questions regarding irrevocable trusts, or any other estate planning matters, contact Gaughan & Connealy for a consultation either online or by calling us at (816) 974-3030.