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Friday, January 25, 2019

Trusts: A Brief Introduction

For individuals interested in estate planning, there seems to be a lot of interest in Trusts, but also a lot of misinformation.  There are certain situations where Trusts are the best estate planning tool to meet an individual's goals, and other situations where Trusts would unnecessarily complicate an otherwise straightforward situation.  There is also a lot of situations that exist in between those two points.  Some background information on Trusts may be helpful.    

Generally speaking, there are two types of Trusts: a testamentary trust and an inter vivos trust.

A testamentary trust is a trust that is created by an individual's Last Will and Testament and does not go into existence until the individual dies.  The trust has no power or effect until the testator passes away and the will is probated.  Unlike an inter vivos trust, a testamentary trust does need to go through the probate procedure.  A testamentary trust can have great benefits to an individual.  It can insure minor children are taken care of in the event of a premature death, it can reduce estate taxes on a spouse, or it can provide for a disabled loved one.  Even though some people believe that probate should be avoided at all costs, there are many situations where probate can be beneficial, including setting up testamentary trusts that may only be necessary for a particular time frame (including important considerations like Special Needs Trusts). 

An inter vivos trust is a trust that is created during the individual's lifetime.  An inter vivos trust has two types  itself: a revocable trust and an irrevocable trust.

A revocable trust are often referred to as a "living" trust."  Here, the individual who create the revocable trust maintains complete control over the trust and may amend, change, revoke, or terminate the trust or its terms at any time.  A revocable trust allows the individual to get the benefits of a trust arrangement while holding onto the ability to change the trust at any time prior to their death.  Revocable trusts are used for several purposes.  The first and most common use of a revocable trust is probate avoidance.  Unlike a Last Will and a Testament, when the individual dies, the property that is in the Trust passes to whoever is named in the trust.  A trust does not have to go through the probate court which can save time, money, and energy for the beneficiaries of the trust.  Revocable trusts can also be used for asset management and tax planning purposes. 

An irrevocable trust is far less flexible, but can provide greater benefits.  An irrevocable trust cannot be changed or amended by the grantor who created the Trust.  Any property that is put into an irrevocable trust may only be distributed by the trustee as provided for in the trust document.  That is why it is very important to be sure before you create an irrevocable trust.  Trying to undo what has been done through an irrevocable trust is difficult, time consuming, and costly.  However, an irrevocable trust is a very popular option for Medicaid planning.  Unlike revocable trusts, property that is placed in an irrevocable trust for a particular period of time (typically at least five years) cannot be reached by Medicare or Medicaid.  This is a great option for individuals who know they never want to sell their property, but can be problematic for individuals who are unsure of what they want for their future. 

Since everyone's individual needs, background, and plans for the future are different, everyone  should consult with their estate planning attorney, their accountant, and their financial advisor prior to setting up a revocable or an irrevocable trust.   

If you have any questions about estate planning or Trusts, please feel free to contact the Law Offices of Samuel S. Reidy for a free consultation.


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