What is a trust?
“Sometimes known as ‘will substitutes,’ revocable and irrevocable trusts are tools that you can use to help ensure your wishes are carried out, protect disabled beneficiaries, help children spend/budget properly, protect assets from creditors or a spendthrift, promote family harmony, etc.,” says Terry Chier, manager of Personal Trust and Estate Management at Thrivent Trust Company.
And they are not just for people with lots of assets; trusts can be used by anyone.
What’s included in a trust document?
Generally, a trust document includes the name of the person(s) who created it [known as the grantor(s) or settlor(s)], the names of the beneficiaries, and directions on how to distribute the assets held in the trust to the beneficiaries.
What are revocable trusts?
Revocable trusts can be revoked or amended at any time until the grantor either passes away or becomes incapacitated. The grantor is typically the trustee and has complete control of any assets held in the trust. During the life of the trust, income earned is distributed to the grantor. Upon the grantor’s death, it becomes irrevocable, and its assets are distributed as the trust document directs.
What are irrevocable trusts?
Irrevocable trusts are permanent. The grantor can’t make changes or updates to the trust. Once transferred, grantors effectively give up ownership rights to the assets. The trustee is in control of the assets and must administer the trust according to the trust document.
What are the key considerations for each type of trust?
Advantages of a revocable trust include its flexibility (i.e., revocable, changeable, etc.), Chier says, and the fact that its assets remain under the control of the grantor/trustee. Revocable trusts are private, meaning their details won’t become publicly known after the death of the settlor.
Disadvantages include the initial cost of having an attorney draft the trust, as well as the time and cost of reregistering your property in the name of the trust. Revocable trusts should be reviewed and amended as circumstances change.
Advantages to creating irrevocable trusts include protecting assets from creditors and spendthrift beneficiaries. They can be used to help preserve eligibility for government programs for special needs beneficiaries. They also can be an effective estate planning tool to minimize federal estate tax liability, especially in large estates, Chier says.
A disadvantage is implied in the name itself, in that it is irrevocable. Additionally, once transferred, you will effectively lose control over the assets placed in the trust.
It’s recommended that when considering a trust, you seek guidance from a tax or estate attorney.