"When developing an estate plan, a common inquiry involves the role and significance of trusts," stated professional fiduciary and certified elder law Attorney RJ Connelly III. "Trusts present a range of potential advantages, including the ability to exert control over the distribution of assets, protection in cases of incapacitation, improved avoidance of probate processes, and opportunities for strategic tax planning. Incorporating a trust into an estate strategy can represent a prudent financial decision for individuals seeking to protect their assets while establishing a comprehensive legal framework for their management and distribution."
A trust involves a trustee, who can be an individual or a third party, responsible for managing the assets in the trust. The trustee must follow the instructions in the trust documents. The grantor sets up the trust and puts assets into it. The grantee, also called the beneficiary, receives the benefits from the trust. The grantor must have the legal right to transfer the assets, while the grantee gets both the assets and the benefits the trust provides.
"There are many types of trusts, each designed for specific purposes," said Attorney Connelly. "These purposes can include moving the value of your home out of your estate, passing life insurance benefits without going through probate, or protecting an inheritance for a child who may not handle money well. Trusts generally fall into two main types: revocable and irrevocable. Each type meets different needs based on your financial and personal situation. I also want to discuss the importance of the Special Needs Trust."
The Revocable Living Trust
A revocable living trust is a flexible legal tool that helps manage and distribute your assets according to your wishes while alive and after your death. Unlike a standard will, a revocable trust avoids probate, which means your property can be transferred to your beneficiaries more quickly and privately. To create a revocable trust, you put your assets into the trust but still keep the power to change or cancel it whenever you want.
A revocable living trust is a formal document that outlines how your assets will be handled after you die. These assets include real estate, personal belongings, bank accounts, and investments. You establish a revocable living trust while you are still alive, whereas a testamentary trust only takes effect after you pass away. The assets in the trust will go to the beneficiaries you name when you die. The key point of a revocable living trust is that you can change or cancel it at any time, which is why it's called "revocable."
The Irrevocable Trust
An irrevocable trust is a legal agreement that cannot be changed or canceled easily once the grantor sets it up. This means the grantor gives up control over the assets in the trust and needs the beneficiaries' approval to make any changes. People often use this type of trust to protect assets from creditors and to lower estate taxes, as those assets are no longer considered part of the grantor’s taxable estate.
When assets are put into an irrevocable trust, the grantor usually cannot take them back or change the trust rules without going to court or getting agreement from all beneficiaries. This strict structure helps protect the assets from legal issues or financial troubles.
One key reason for creating an irrevocable trust is to protect against creditors and lawsuits. By moving assets into this trust, the grantor removes them from their estate, reducing the risk of claims against them and safeguarding what beneficiaries will inherit.
Another important benefit is lowering estate tax bills. Because the assets in the irrevocable trust belong to the trust and not the grantor, they are not counted as part of the grantor's taxable estate after death. This can lead to lower estate taxes, allowing more wealth to go to beneficiaries without heavy taxes. So, an irrevocable trust acts as both a protective tool and an effective estate planning device.
The Special Needs Trust
A special needs trust (SNT) is a legal tool that helps people with disabilities keep their public benefits while having assets. SNTs are sometimes called supplemental needs trusts. In this setup, the beneficiary does not own the assets in the trust; instead, a trustee manages these assets to support the beneficiary's government benefits.
The assets in the trust do not count when deciding if the beneficiary qualifies for programs like Medicaid or Supplemental Security Income (SSI). It’s important to remember that this trust is meant to add to existing government benefits, not replace them.
There are two main types of SNTs: a first-party SNT, which is funded by the beneficiary's own money or assets, and a third-party SNT, which is funded by someone else, like a parent or grandparent. Creating an SNT is particularly important if a person with a disability has assets that might affect their eligibility for public benefits or if they receive a personal injury settlement or a large amount of money.
A Trust or Will?
"Keep in mind that a will only takes effect after death, so if you become incapacitated, a will doesn't hold any legal weight, and decisions will hinge on your healthcare or durable powers of attorney, which may not be readily accepted for financial matters by outside parties," said Attorney Connelly. "And the probate process can be both time-consuming and expensive. Each state where the deceased person's assets are located requires probate, and since a will is a public document, it can be contested, potentially revealing sensitive information."
"In contrast, assets held in a trust can be managed more privately than those going through probate," he continued. "While wills can incorporate testamentary trusts, these still necessitate probate, which might not align with the deceased's original wishes. However, a living trust facilitates planning during your lifetime, allowing you to circumvent probate and retain control over how your assets are distributed."
A Final Word
"Establishing a trust can often be more intricate, requiring more time than simply drafting a will," stated Attorney Connelly. "Finding peace of mind in knowing that your wishes will be honored and that the people and causes you care about will be looked after according to your intentions makes the effort worthwhile. I encourage you to contact our office to help create a trust that fits your unique needs. Our experienced team is here to guide you through the intricacies of trust development, ensuring that your legacy is preserved just as you envision it."
Please note that the information provided in this blog is not intended to and should not be construed as legal, financial, or medical advice. The content, materials, and information presented in this blog are solely for general informational purposes and may not be the most up-to-date information available regarding legal, financial, or medical matters. This blog may also contain links to other third-party websites that are included for the convenience of the reader or user. Please note that Connelly Law Offices, Ltd. does not necessarily recommend or endorse the contents of such third-party sites. If you have any particular legal matters, financial concerns, or medical issues, we strongly advise you to consult your attorney, professional fiduciary advisor, or medical provider.
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