As mentioned in a previous blog post, an estate plan is a collection of important legal documents that specify how you want your final wishes to be carried out if you should become incapacitated or die. Everyone needs an estate plan; this is not something that applies only to the wealthy.
Your estate is simply everything you own, including your bank accounts, your home, your vehicles, your furniture, your keepsakes and even your beloved pet. Everyone has an estate.
One important component of an estate plan is a living trust, which is a legal arrangement made by an individual (called the “grantor”) to protect his or her assets and direct how they will be distributed after he or she dies. It is a valuable estate planning tool that can help family members and beneficiaries avoid a long, complicated, public and sometimes costly probate process. The grantor designates a “trustee,” which can be either an individual or a company, to control his or her assets for the benefit of the beneficiaries.
Your trust can have beneficiaries, just like a will does. You can name your spouse, children, other family members, close friends or a charitable organization as your trust’s beneficiary. Whomever you name is entitled to receive assets from the trust, based on how you direct the trustee to distribute them.
There are revocable and irrevocable trusts, and each type serves important purposes. In many cases, it makes sense to have both. We recommend that you work with your financial advisor to figure out which is appropriate for your situation.
However, revocable trusts are more common than irrevocable trusts because they tend to be more flexible. Here are some reasons why revocable trusts are an important key in estate planning, as well as some facts about irrevocable trusts.
1. You can change a revocable trust at any time
As the grantor, you can change your revocable trust or transfer property out of it at any time without getting permission from anyone. You can even dissolve the trust. This is actually how this particular trust got its name — you can revoke the trust, so it is revocable. This allows you to maintain control of your assets during your lifetime. During major life transitions, such as a divorce or acquisition of new assets. You might need to update the terms of your trust.
Another benefit of a revocable trust is that if it holds any real property you own in other states, then your estate will avoid going through separate probate proceedings in those other states following your death.
The transfer of assets and the guidelines you specify for how your assets will be handled will not become permanent until you pass away. However, upon your death, a revocable trust automatically becomes irrevocable and cannot be changed. It’s also important to note that once you fund a regular trust, the trust becomes the owner, not you.
2. A revocable trust allows you to manage your assets while you are still alive
You can use a revocable trust to manage property in the event you become incapacitated. You can name a successor trustee to manage your affairs. Taking this important step will prevent a court from appointing a conservator to manage your affairs if you become unable to do so.
3. How a revocable trust impacts estate taxes
When you transfer assets to a revocable trust, those assets are removed from your estate for state probate law purposes, but not for federal or state estate tax purposes. For estate tax purposes, the value of your “gross estate” will determine the amount of estate tax due at your death. Because you retain the right to alter your revocable trust at any time, there are no estate tax planning benefits inherent in using a revocable trust.
4. You still need a will
Please note that a revocable trust does not replace a will. Even if you have a revocable trust, you still need to have a will that specifies how to distribute any assets you did not transfer to the trust during your lifetime. Your will also serves to designate an executor (or personal representative), as well as a guardian for any minor children.
5. Revocable trusts have some limitations
Although revocable trusts provide powerful estate planning benefits, they do have some limitations. For example, they cannot protect your assets from creditors; only an irrevocable trust can do that. Also, revocable trusts will not save you money on your income taxes or estate taxes.
6. Only three situations call for irrevocable trusts
Now that we have established the benefits of revocable trusts, we want to clarify that there are typically only three situations in which irrevocable trusts are appropriate. As mentioned, with irrevocable trusts, you have to relinquish control over your assets and rely on someone else to manage them. The only three type of situations in which you might want to establish an irrevocable trust are when you want to minimize estate taxes, meet eligibility requirements for government programs or protect your assets from creditors.
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Like all other financial-planning tools, the type of trust you set up depends on your financial situation and what you want to accomplish in the future. Please contact us, and we will be happy to help you discover what type of trust is right for you and your family and to discuss other important estate planning resources.
Any opinions are those of the author and not necessarily those of Raymond James. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. No investment strategy can guarantee your objectives will be met. Past performance is no guarantee of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
