Trusts are legal documents that create separate legal entities. Unlike a corporation, a trust is not subject to public record though, so its terms and parties can remain private. They are essential parts of estate planning and are not just for the wealthy. Depending on one’s needs, a trust can be beneficial for people of all income levels. Trusts can be complicated and highly detailed though, so it’s imperative to have a trusted estate planning attorney assist in drafting your documents.
The parties to a trust include the grantor who creates and funds the trust, the trustee who manages and distributes the assets, and the beneficiaries for whom the trust grants the assets to. A single person can be any combination of the three. There are many types of trusts than can be created. However, they can be categorized in two different ways: testamentary trusts versus living trusts, and revocable trusts versus irrevocable trusts.
Testamentary Trust versus Living Trust
A testamentary trust is usually created as part of a last will and testament. It does not become effective until death and as such is always revocable. The beneficiaries do not receive any assets until the grantor passes away. The estate will still have to go through the probate process before the assets are placed in the trust, thus, the assets may not be immediately available to the beneficiaries. Testamentary trusts are still useful when a grantor has certain terms and conditions, such as leaving money to a beneficiary for education purposes or wanting one’s children to reach a certain age before receiving the assets.
A living trust or inter vivos trust is created and becomes effective during the grantor’s life. The grantor will fund the trust and the trustee will manage those assets according to the terms of the trust for the benefit of the named beneficiaries. A living trust can be revocable or irrevocable.
Revocable Trust versus Irrevocable Trust
Revocable trusts are often used to avoid the costs of probate and ensure assets are immediately available upon death. Its terms can be changed at any time prior to death and can be completely revoked if so desired. The grantor is usually also the trustee until his or her death, and the assets of the trust remain available to the grantor.
They are beneficial because the assets become immediately available upon death rather than having to go through the probate process. Another benefit is that an aging grantor can utilize it to appoint a trustee to manage his or her assets. Privacy is another benefit over a will as the trust will not have to be filed in a court record like a will or testamentary trust. The downfall of a revocable living trust is that it does not provide asset protection or tax avoidance.
Irrevocable trusts cannot be revoked which means the assets cannot be returned to the grantor. However, the terms can be amended if the original trust document allows. They are primarily utilized for asset protection and tax avoidance. Assets transferred to an irrevocable living trust cannot be taken by creditors of the grantor. Likewise, the assets can grow tax-free until distributed. There are many specific types of irrevocable trusts that can be narrowly tailored to a wide array of needs.
Who Benefits from Creating a Trust?
You do not have to be wealthy to benefit from a trust. Trusts are a critical part of estate planning. They are frequently used to avoid lawsuits, protect assets, maintain privacy, avoid probate, avoid taxes, and provide restrictions and conditions upon heirs. Trusts are beneficial to business owners who wish to have their business information such as valuations kept private and out of the court record.
Owners of highly appreciated assets use trusts to avoid income and capital gains taxes. People with dependents use trusts to provide regular income to dependents rather than leaving them a lump-sum. People with children from prior marriages utilize trusts to ensure their assets are properly managed for the children’s benefit and to ensure the assets stay in the family.
Married individuals may utilize a trust to ensure their surviving spouse is financially secure but ensure their assets stay in the grantor’s family upon remarriage. Parents of children with special needs utilize special needs trusts to ensure their children don’t lose their public benefits. Unmarried persons utilize trusts for the benefit of their significant others while ensuring their assets remain in their families. As you can see, there are many considerations that can go into deciding whether or not to create a trust.
New Orleans Estate Planning Attorneys
Bowes, Petkovich & Palmer, LLC is a Gretna law firm that has served the New Orleans area since 1980. Our experienced estate planning lawyers can analyze your situation and advise you which trust will best suit your needs. We take pride in offering a personal and trusted experience. Call us today for a free consultation and find out why so many of our clients come back to us.