Trust planning is becoming increasingly more common for a number of reasons. Grantors may desire to maintain privacy, provide for ongoing care needs of a loved one or protect property from potential future creditors.
Although trusts vary widely in both their uses and their provisions, two primary considerations are most common: Whether to use an inter vivos trust or a testamentary trust and whether to use a revocable trust or an irrevocable trust.
First, the primary choice that must be made is whether the trust will be inter vivos or testamentary. The term ‘inter bivos’ simply means that the trust is set up during lifetime. The individual setting up the trust, called the hrantor, must decide whether the trust will go into effect immediately or upon death.
The benefit of an inter bivos trust is the trust itself is an entity that holds property. Any property placed into the ownership of the trust during the grantor’s lifetime simply will pass to beneficiaries, effectively bypassing probate.
Because the trust bypasses probate, no inventory is filed with the court and the terms of the trust remain private. Beneficiaries usually receive their inheritance much more quickly through the trust than through the probate proceeding.
A testamentary trust, on the other hand, only takes effect upon the grantor’s death. This type of trust is generally created through a last will and testament, so it does not bypass probate and therefore cannot provide privacy. However, the benefit to a testamentary trust is the grantor has very little up-front work, leaving the executor the work of probating his or her will and transferring property into the trust.
The second choice that must be made is whether to create a revocable Living Trust or an Irrevocable Trust.
Some benefits of trust planning are identical for both types: Both bypass probate, both maintain privacy, both offer comprehensive instructions for distributions, and both should include provisions for disabled beneficiaries.
However, there are both benefits and opportunity costs for either choice.
Revocable living trusts are much easier to use. Grantors remain in full control of assets, so long as they have mental capacity, and all assets within the revocable living trust can be used for the grantor’s benefit.
To choose a revocable living trust does require trading asset protection. Because the grantor has full control over assets, and because all assets are used for the grantor’s benefit, there is no creditor protection for the grantor. No creditor protection also means that the trust will not qualify the grantor for VA Special Monthly Pension or Medicaid benefits in the future.
Irrevocable trusts are more complicated to use, but do provide lifetime asset protection. Unlike the Revocable Living Trust, this lifetime asset protection can help to qualify the Grantor for VA Special Monthly Pension or Medicaid benefits in the future. The Grantor may also be able to continue to receive income earned by trust-owned assets.
The trade-off to use the Irrevocable Trust is control. The Grantor must give up control over trust owned assets in order to obtain asset protection, and assets cannot be directly used to pay for Grantor’s needs. For that reason, Irrevocable Trusts should be funded with assets that are set aside to go to beneficiaries rather than assets that are used to pay for the grantor’s daily living expenses.
The determination of which type of trust should be created depends on the grantor’s goals and risk tolerance. In some cases, using both types of trusts may be necessary.
Every planning option has benefits as well as opportunity costs. Understanding the options will ensure grantors can execute documents that reflect their goals.
Cynthia Griffin is an elder law and estate planning attorney at Burnett and Griffin PLLC in Elizabethtown. She can be reached at firstname.lastname@example.org.