It is an all-too-common misconception that a trust is a sophisticated legal instrument reserved exclusively for only the wealthy. The reality, however, is that trusts are one of the most commonly used estate planning arrangements with a proven track record for being a highly reliable method of ensuring an individual’s final wishes are implemented correctly.
Regardless of age, amount of assets, or family size, everyone should have a detailed estate plan in place to ensure that the highest percentage of the estate’s assets pass to the owner’s intended beneficiaries. Failing to adequately plan ahead can result in family arguments, unexpected tax implications, and higher than necessary probate expenses – all of which are avoidable by being proactive.
When it comes to estate planning, the first thought that comes to many people’s minds is that a simple will is all that is needed. Unfortunately, while wills are important estate planning tools, they often are inadequate on their own to fully cover the management of an entire estate. Any estate plan with a degree of sophistication may require a trust and other actions to supplement a will. The main advantage of trusts is their versatility. Many types of trusts exist and can be adapted to suit nearly every scenario and client. The following is a brief overview of trusts and examples of some common trust arrangements. This list is far from exhaustive. For a complete analysis of what type of trust is best-suited for your situation, it is important to consult with an experienced estate planning attorney.
A trust is a fiduciary relationship that allows a third party (also known as the “trustee”) to hold and maintain the assets of the “grantor” (or creator of the trust) on behalf of a beneficiary or beneficiaries. The trustee can be any individual or entity that can legally take title to property, and is obligated to manage that property in the best interests of the beneficiary according to instructions in the trust document. Trustees can be the grantors themselves, the spouse or adult child of the grantor, or another third party. The trust beneficiaries are the parties receiving the benefit of the arrangement. They do not have to have the same percentage or type of interest in the trust assets. For example, the trust may grant one-fourth of the property, also called the “corpus,” to one beneficiary and the balance of the property to another.
Revocable vs. Irrevocable Trusts
Depending on the wording of the trust document, the instrument can be either revocable (i.e., “modifiable”) or irrevocable (i.e., “non-modifiable”). The main difference between these two trust options is that, in a revocable trust, the grantor retains overall control; whereas, in an irrevocable trust, the grantor gives up control of the trust property. The majority of clients instinctively favor revocable trusts: Why should they choose to transfer their money into an inflexible arrangement when they could have a modifiable version just as easily?
Obviously, there has to be some advantages of irrevocable trusts. Otherwise, they would not exist in the first place. The inability to revoke or alter the trust is a sort of “trade-off” that actually gives the grantor several benefits – namely asset protection. In a revocable trust, the grantor retains legal ownership of their assets, so there is always the possibility of losing them to creditors or pending litigation. An irrevocable trust transfers those assets from the grantor so they are no longer considered the true owner and are thereby safeguarded from the grantor’s outstanding debtors.
A living trust is typically created during the grantor’s lifetime via a transfer of property to a designated trustee. The grantor usually reserves the right to modify or cancel the trust while they are still living. Following the grantor’s passing, this type of trust instrument becomes irrevocable, meaning that the trust cannot be altered and the aforementioned trustee must then abide by the rules spelled out in the trust regarding the distribution of the property and the payment of taxes and related expenditures. This type of trust arrangement has several pros and cons that need to be factored into the estate planning process. Advantages of a living trust include: providing for the healthcare provisions and end-of-life wishes of the grantor, protecting against the incapacity of the grantor and/or beneficiaries, bypassing probate delays and fees, simple succession of trustees, instant access to income and principal for beneficiaries, and privacy if the state mandates the filing of an asset inventory. A living trust, however, comes with certain limitations – the most significant being that this type of trust does not offer protection from creditor claims because the grantor is considered to be the owner of the trust’s assets.
A testamentary trust, sometimes referred to as a “trust under will” or a “springing trust” because it springs from the will, is created by a will following the grantor’s death. This type of trust is a strategic and flexible estate-planning tool to achieve specific goals including: preserving assets for children from a previous marriage, providing for a spouse’s financial well-being through a qualified terminable interest property (QTIP) trust, ensuring that a beneficiary with special needs will receive adequate care, enabling minors to take legal title of property to safe-keep their assets until they can take full title after reaching legal age, and giving to charities.
Irrevocable Life Insurance Trust (ILIT)
An irrevocable life insurance trust can be an integral component when it comes to large estates with considerable amounts of valuable assets. The federal government permits individuals a $2 million estate tax exemption (this amount varies year-to-year) with any amount above that being exposed to estate taxes that can be as high as 45% of the total value of the estate. An ILIT offers the grantor a flexible option by excluding life insurance proceeds from both the estate of the first spouse to pass away and from the estate of the surviving spouse. ILITs are funded by a life insurance policy, and the trust simultaneously takes legal ownership of the policy and is designated the beneficiary of the policy. However, the grantor’s heirs can remain beneficiaries of the trust itself. For the ILIT to remain viable, the grantor has to live for three years following the policy transfer or else the policy proceeds will not be excluded from the grantor’s estate for tax purposes.
The Bottom Line
The estate planning process (including deciding what type of trust works for you) is inherently complex, and the decisions you make now can have significant and lasting effects for your loved ones. At Beller & Bustamante, P.L., we have over three decades of experience preparing, maintaining, and executing estate plans of all sizes and levels of complexity. Whether you need help drafting a living trust or advice on how to reduce estate costs and complexity, our attorneys are here to ensure that all of your estate planning and probate needs are met. Don’t let just anyone handle your Florida estate planning needs; there is simply too much at stake. Contact our estate planning attorneys for a consultation at (904) 288-4414 to start planning for your future today.