This week’s blog is written by guest author, Lyle Solomon, principal attorney with Oak View Law Group.
Trusts can be broadly classified into four distinct types. They are divided based on when they become effective and who the owner of the assets is. The four types of trusts are living, testamentary, revocable and irrevocable.
It doesn’t matter which kind of trust you choose to go with; you just need to establish it during your lifetime.
Living trusts
A living trust comes into effect as soon as it’s created. The trustee of the living trust manages the trustor’s assets for the beneficiaries.
Living trusts are designed in such a way that they don’t have to undergo probate. You should know that only those assets that are included in the trust will be able to avoid probate; the rest will have to undergo probate. If there is no trustee in the trust other than you, the trust document will be called a “declaration of trust”; otherwise, it’s called a “trust agreement.”
Here are a couple of things to consider with regard to a living trust:
- Privacy concerns. Living trusts offer a certain level of privacy for your assets, and this is because only the trustees are privy to the terms of the trust.
- Is it expensive? Generally speaking, creating a living trust can be expensive. Based on what you’re setting up the trust for, your living trust can be revocable or irrevocable.
Testamentary trusts
If you set up a testamentary trust, it’ll come into effect only after your death. In many cases, a testamentary trust is included in someone’s will. Wills must undergo probate before the assets are distributed among the beneficiaries, and thus, trusts included within will also undergo probate. Thus, it takes longer for a testamentary trust to come into effect than a living trust.
Here are a few things to consider with regard to a testamentary trust:
- How hard is it to change the terms? It is very difficult to make changes to a testamentary trust, mainly because they’re included within a will. Any change you seek to make to a testamentary trust means that you’ll also have to make changes to the will.
- Does it offer you privacy? Testamentary trusts do not offer privacy when it comes to your assets. Many people open trusts to hide their assets, and they are included in wills and become public when they enter probate. If you want your asset information to remain private, opening a living trust is the way to go.
- How much does it cost? It doesn’t cost very much to open a testamentary trust. There’s no extra paperwork involved because it is included within a will, and thus it costs less than a living trust.
- Is it revocable or irrevocable? In the case of a testamentary trust, as you’re the trustee, you can make any changes you want to the trust while you’re still alive. Thus a testamentary trust remains revocable during your lifetime. It becomes irrevocable after your death.
Revocable trusts
Generally, the main motive behind setting up a revocable trust is to do away with the hassle of probate. Apart from that, it is also set up because you, being the trustee, can decide what happens to your assets and what the terms of the trust are going to be.
Here are a few things to consider with regard to a revocable trust:
- Avoiding probate. Upon your death, the trust that was revocable during your lifetime becomes irrevocable. When you, the trustee, have passed away, then the assets go to the successor trustee and they won’t count it as part of your estate. Because of that, they don’t need to undergo probate and the successor trustee can distribute the assets according to your wishes without waiting for the court’s approval.
- What happens to my assets after I set it up? As you’re the only trustee in your lifetime, you have the right to do as you please with your assets… even after setting up the trust.
- What about the terms? You’ll also be able to change any terms of the trust according to your wishes. For example, you can change the beneficiaries and when they’ll be eligible to receive your assets. You also have the right to terminate the trust if you wish.
Irrevocable trusts
If you set up an irrevocable trust, you’ll no longer be the owner of the assets included in it, and you won’t be able to change the terms of the trust. Because the assets no longer belong to you, you also won’t have to pay their estate taxes. Thus, avoiding taxes or reducing their burden is the main reason behind setting up an irrevocable trust.
Here are a couple of things to consider with regard to an irrevocable trust:
- The federal gift tax. If you transfer any of your assets to an irrevocable trust, it’ll be subjected to the federal gift tax. If the value of the assets is below $14,000, you won’t have to pay tax for those; however, if it is above $14,000, you’ll have to pay the gift tax.
- Protecting your assets. You can consider setting up an irrevocable trust if the beneficiary is underage, financially irresponsible, or has a disability. Some irrevocable trusts only distribute money in specific time intervals, and the rest of the funds are kept out of everyone else’s reach.
Conclusion
Which trust you should go with depends on what your intentions are. If you want to avoid taxes, setting up an irrevocable trust makes the most sense. If you want to retain control over your assets, you’d want to set up a revocable trust. If you’re not sure which kind of trust you should set up, you should consider consulting an estate planning attorney who can help weigh the pros and cons of each. In next week’s blog, we’ll discuss charitable trusts and how they can help you leave a lasting legacy.
Author Bio
Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a principal attorney.