A trust is a common addition to the average estate plan. If you are contemplating the addition of a trust to your plan, choosing the right type of trust is a critical decision that can have far-reaching implications for your assets, beneficiaries, and overall estate planning goals. To determine which type of trust is best suited for your estate plan, you need to consider several factors, including your financial situation, your estate planning objectives, and the specific needs of your beneficiaries. While it is always best to consult with an experienced estate planning attorney when making decisions about your estate plan, the attorneys at Legacy Estate Planning, LLC offer some helpful information when trying to decide what type of trust is right for your estate plan.
Trust Basics
A trust is a legal arrangement where you (the Grantor) transfer assets to a Trustee, who manages those assets for the benefit of your beneficiaries. Trusts can be broadly categorized into testamentary and living trusts. As the name implies, a living trust is created and administered during your lifetime while a testamentary trust is created through a provision in your Last Will and Testament and is administered after your death.
Living trusts are further categorized as revocable or irrevocable. A revocable trust can be altered or revoked by the Grantor at any time during the Grantor’s lifetime. Revocable trusts offer flexibility and control, allowing you to make changes as your circumstances or wishes change. A revocable trust also helps your estate avoid probate and allows you to plan for the possibility of incapacity.
Conversely, an irrevocable trust cannot be easily changed or revoked once it is established. Irrevocable trusts are often used for more specific purposes, such as reducing estate taxes, protecting assets from creditors, or providing for a beneficiary with special needs. Because you relinquish control over the assets placed in an irrevocable trust, these trusts can offer significant tax advantages and asset protection benefits.
Factors to Consider When Deciding Which Type of Trust Is Right for You
Choosing the right type of trust for your estate plan requires careful consideration of your unique circumstances and objectives. Consulting with an experienced estate planning attorney is the best way to ensure that you create the right type of trust. Some factors to consider when deciding what type of trust is right for you include:
- Goals and Objectives: The overall purpose of your trust should be the first thing you consider when deciding which type of trust to create because certain trusts are better at achieving certain goals. For example, if your primary goal is to avoid probate, a revocable trust will achieve that goal while still providing you with flexibility and the ability to easily make changes to the trust. On the other hand, if the purpose of your trust is to reduce estate taxes, protect assets from creditors, or provide for a special needs beneficiary, an irrevocable trust might be more appropriate.
- Tax Implications: You should always consider the tax implications when making changes to your estate plan. A revocable trust does not provide any tax benefits during your lifetime, but it can simplify the distribution process and potentially reduce the overall estate administration costs. An irrevocable trust, however, can help reduce estate taxes and shield assets from creditors because once assets are transferred into the trust they become trust property, meaning the value of those assets is not included in the value of your estate after you pass away for gift and estate tax purposes. An Irrevocable Life Insurance Trust (ILIT) is a specialized trust that removes life insurance proceeds from your taxable estate, reducing estate taxes.
- Beneficiary Needs: If your beneficiaries are minors or have special needs, you might consider a trust specifically designed for these situations. There are numerous specialized trusts that may work. For example, a special needs trust can ensure that a disabled beneficiary receives the necessary support without jeopardizing their eligibility for government benefits while a spendthrift trust can help protect assets earmarked for a beneficiary with a history of not handling money well.
- Asset Protection: If protecting your assets from potential creditors or lawsuits is a priority, an irrevocable trust can provide this protection, as the assets are no longer considered your property. A Qualified Personal Residence Trust (QPRT) is a specialized type of trust that allows you to transfer your residence to a trust, reducing the taxable value of your estate while retaining the right to live in the home for a specified period.
- Incapacity Planning: If planning for the possibility of incapacity is your goal, consider a revocable living trust. You can name yourself as the Trustee and name a spouse, parent, adult child, or other trusted individual as the successor Trustee who will take over automatically if you become incapacitated.
Can We Help You Create a Trust?
If you are ready to create a trust, contact the experienced Bellevue trust attorneys at Legacy Estate Planning, LLC by calling (425) 455-6788 to schedule an appointment.
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